Planning for retirement isn’t just about saving enough—it’s about knowing how to make that money last. A Living Annuity gives you flexibility and investment control after retirement, but how much do you actually need to retire comfortably?
Let’s explore how to calculate your retirement goal, how to set a sustainable drawdown rate, and how to avoid running out of money in the years ahead.
How a Living Annuity Works
A Living Annuity lets you draw an income in retirement while keeping your capital invested. You can adjust your income rate each year (between 2.5% and 17.5%) and shift your investments to suit your needs and risk appetite.
Unlike a Guaranteed Annuity, you keep control—and your remaining capital can be passed to your beneficiaries.
The challenge? Balancing income needs with long-term sustainability. That starts with funding your annuity properly.
How Much Capital Do You Need?
Your lifestyle in retirement depends on how much you’ve saved—and how you manage it. There’s no one-size-fits-all number, but here’s a general approach:
- Estimate your desired annual income
- Subtract other income sources (e.g. rental income or part-time work)
- Divide the gap by 5% to get a sustainable drawdown base
- Multiply that by 150% to create a safety buffer
Example:
- You want R40,000/month (R480,000/year)
- You expect R180,000/year from other sources
- You need R300,000/year from your annuity
- Divide by 5% = R6,000,000
- Multiply by 150% = R9,000,000 safe capital target
This buffer accounts for emergencies, market shocks, and inflation.
Don’t Forget Inflation
Even if your investments earn more than your drawdown, inflation eats away at purchasing power. That’s why you need to earn real returns—returns above inflation—to maintain your lifestyle.
Use the Golden Rule to Stay on Track
Here’s a simple rule to test your retirement income strategy:
Drawdown + Fees + Inflation ≤ Investment Returns
If your investment earns 10%, but drawdown is 5%, fees are 2%, and inflation is 5%—you’re losing ground. Keep these inputs balanced, or your capital could slowly erode.
Key Risks and How to Manage Them
1. Market Risk
When markets drop, so does your capital—and if you’re withdrawing income at the same time, your funds can deplete faster. This is where diversified investments help cushion the impact.
2. Longevity Risk
You might live longer than expected. A 30-year retirement is no longer unusual. Your plan needs to last as long as you do.
3. Inflation Risk
Costs rise over time. If your investment returns don’t beat inflation, your income might not be enough in the future.
4. Fee Risk
High fees eat into returns. Lowering costs allows more of your money to grow and compound over time.
How to Keep Your Income Sustainable: Start with the Right Drawdown
A lower drawdown rate increases the chance your money lasts. Here’s what happens to R1 million capital over time at different drawdowns:
- 4% = Lasts 30+ years
- 6% = May last 20–25 years
- 8% = Risk of running out in 10–15 years
Choose the Right Asset Mix
Don’t go too conservative too soon. While bonds and cash are stable, they often underperform inflation. Equities provide long-term growth but come with short-term ups and downs. A balanced portfolio helps manage both.
Review and Adjust Annually
You can adjust your drawdown and investment strategy each year. If markets have dropped, consider lowering your income temporarily. If your expenses rise, review your mix or tap into other sources instead of hiking drawdowns immediately.
Use Surplus Wisely
If your drawdown gives you more income than needed, consider reinvesting the extra into a tax-advantaged vehicle like a Retirement Annuity, which can later feed into your Living Annuity.
Plan for Your Time Horizon and Risk Profile
If you’re younger or expect a long retirement, you’ll need more growth—and can take more risk. If your time horizon is shorter, or your priority is income stability, you’ll need a more conservative approach.
Either way, the goal is the same: preserve capital, grow income, and keep pace with inflation.
In Summary
- Estimate your income needs and build in a safety margin
- Aim for a sustainable drawdown—ideally around 4–5%
- Keep inflation, fees, and returns in balance using the Golden Equation
- Diversify your assets and adjust over time
- Keep costs low and use surplus income smartly
Try Our Living Annuity Calculator
Not sure if you’re on track? Use our Living Annuity Calculator to model your retirement income, investment returns and drawdowns—and see how long your capital might last.
Need Help Structuring Your Retirement Income?
Speak to an Investonline adviser for a free, personalised report. We’ll help you build a plan that balances income with long-term sustainability—so you can retire with clarity and confidence.
