Your Living Annuity gives you control over how much income you draw and how your money is invested. But with that flexibility comes responsibility. If you draw too much, too soon, your money might not last. So how do you choose the right drawdown rate—and how do you make sure it stays sustainable?
Here’s what you need to know about managing withdrawals, protecting your capital and keeping your retirement income on track.
What Is a Drawdown Rate?
Your drawdown rate is the percentage of your Living Annuity that you withdraw each year. In South Africa, the legal range is 2.5% to 17.5%. You can choose how often to receive income—monthly, quarterly or annually—and adjust the rate once a year.
The lower your drawdown rate, the longer your money is likely to last. If you draw too much, especially early in retirement, you could run out of capital.
The Golden Rule for Retirement Income
To check if your drawdown is sustainable, use this simple formula:
Investment Return ≥ Drawdown + Fees + Inflation
This “Golden Equation” helps you balance what you’re withdrawing with what your investment is earning. If the equation doesn’t balance, your capital shrinks.
For example:
- Investment return: 10%
- Inflation: 5%
- Fees: 2%
- That leaves 3% for drawdown
If you’re drawing more than 3%, your savings could erode over time. To stay sustainable, many retirees aim for a drawdown of 4–5%, provided fees are low and returns are steady.
Why Fees and Inflation Matter
Even small fees can take a big bite out of returns, especially over 20–30 years. Inflation also reduces the real value of your income—R20,000 today will buy less next year.
Keeping your fees low and reviewing your drawdown rate regularly can help preserve your capital and maintain your income.
Living Annuity vs Guaranteed Annuity
With a Living Annuity, you manage your investments and adjust your income over time. You carry the market risk, but you also keep flexibility and the potential for growth. Any remaining funds can be left to beneficiaries.
With a Guaranteed Annuity, you get a fixed income for life. There’s no investment risk—but also no flexibility or growth. You trade control for certainty.
How to Use Surplus Income
If your 2.5% minimum drawdown gives you more income than you need, you can reinvest the excess. For example, contributing to a Retirement Annuity offers tax benefits and can later be converted into more Living Annuity capital.
Lowering Your Drawdown Rate
To reduce your drawdown and make your money last longer:
- Use your tax-free lump sum strategically
- Keep monthly costs low
- Delay major purchases
- Ensure you have other income streams
The early years of retirement are especially important. If you can limit withdrawals while your capital grows, you’ll improve the long-term sustainability of your income.
Getting Your Asset Allocation Right
Drawdown isn’t the only factor. Your underlying investment portfolio needs the right balance between growth and stability.
If you’re too conservative too early—say, holding mostly cash and bonds—you might not beat inflation. But too much risk can also cause problems in a downturn.
A well-diversified mix of equities, bonds and cash gives you a better chance of steady growth without taking on unnecessary risk. The mix should match your risk tolerance, time horizon and income needs.
Thinking Long-Term
Retirement can last 30 years or more. That’s why it’s important not to make decisions based only on today’s market. Focus on long-term sustainability:
- Keep drawdowns reasonable
- Watch your fees
- Choose growth assets wisely
- Adjust as your needs and conditions change
Offshore Exposure and Diversification
Living Annuities allow up to 100% offshore investment. This helps you reduce local currency risk and access global markets. But balance is key. If most of your costs are rand-based, consider how much foreign exposure makes sense.
Summary: What to Keep in Mind
- Start with a drawdown of 4–5% if possible
- Keep fees low to preserve more capital
- Balance your portfolio with both growth and stability
- Reinvest surplus income if you don’t need it
- Review your plan each year to adjust for changes in the market or your lifestyle
Want to See How Long Your Money Could Last?
Use our Living Annuity Calculator to model your income, fees and investment returns—and test different drawdown scenarios.
Still unsure about your drawdown strategy? Speak to an Investonline adviser for a free comparison report tailored to your goals.
