Are you drawing too much from your living annuity?

*This content is brought to you by Brenthurst Wealth

By Tanita Conradie*

Entering retirement is a defining moment in anyone’s life. It’s also a major milestone that forces you to finally face up to whether you’ve saved enough to support your retirement lifestyle.

This can be a harsh reality check for many when they sit down to plan how much income they can expect from their life savings. That sum will be determined mainly by how much you’ve saved, but also by how you choose to invest your savings in retirement.

What you’re looking for is a fine balance between growing your savings even while withdrawing from this pot.

Get the right financial advice

The dangers of getting this wrong are highlighted in the FAIS Ombud’s 2022 annual report that was released in November.

The report is littered with real-life cases that the Ombud adjudicated between investors and their advisors. One of the common complaints it sees is of investors drawing too much every year, meaning they run out of money too soon. This is especially true of living annuities, which allow you to draw between 2,5% and 17,5% of your savings every year. 

In an ideal world, the growth of your savings will be higher than your withdrawal rate so that your capital depletes in a more orderly manner.

The Ombud report highlights that all too often advisors simply act on the wishes of the client in deciding how much to withdraw. In some cases, their chosen withdrawal rate is simply too high for the savings they have, meaning they won’t be able to sustain their lifestyle throughout their retirement.

That has obvious, and unthinkable, consequences. Especially if funds are invested in low-risk, but also low-return investments that don’t keep pace with inflation.

The impact of bad financial planning

As a general rule, we advise clients to withdraw between 4% and 5% when retiring. This withdrawal rate will help your portfolio grow over the long term, while still paying you a reasonable income.

The table below is a handy guide that shows the proposed maximum sustainable withdrawal rates for different age groups.

FSCA Standard – proposed maximum sustainable withdrawal rates for living annuities.
AgeMaleFemale
554.5%4.0%
605.0%4.5%
655.5%5.0%
705.5%5.0%
756.0%5.5%
807.0%6.0%
858.0%7.0%

# In the case of joint life = take rate for the youngest person minus 0.5%

Let’s see how different withdrawal rates affect your income, and how long it will sustain you.

If you decide to retire today and need a monthly income of R40 000 before tax (4% per annum), the value of your retirement savings would need to be about R12 million.

The following two scenarios compare the effect on your living annuity capital if you withdraw too much from the start of retirement versus if you start with a sustainable withdrawal rate.

SCENARIO 1
Living annuity R12 000 000
Investment growth rate8%
Inflation rate6%
Income withdrawal rate p.a.7%
Monthly income before taxR70 000
Investment term30 Years
Chart, histogram

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SCENARIO 2
Living annuity R12 000 000
Investment growth rate8%
Inflation rate6%
Income withdrawal rate p.a.4%
Monthly income before taxR40 000
Investment term30 Years
Chart, histogram

Description automatically generated

As you can see, a more conservative drawdown of the same capital sum over the same period delivers life-changing results.

Remedies to consider

If you find yourself in a position where you’re withdrawing too much income from your living annuity capital, I suggest switching to a guaranteed annuity, also known as a life annuity. The advantage is that you are then guaranteed an income for the rest of your life based on your capital savings and a defined drawdown rate.

Or you could consider a joint life annuity, which means that if you as the contract owner of the guaranteed annuity passes away, your spouse will still receive an income.

Alternatively, you could look at a hybrid annuity. This is a combination of a living annuity and a guaranteed annuity, which has become very popular lately because of the extreme market volatility. With this option, part of your income is guaranteed, and the remainder still has exposure to the markets, which can be beneficial in the long term. The added benefit is that this model means some capital will be available to your beneficiaries.

The point I’m trying to illustrate is that there a variety of options are available. What’s most important is getting qualified advice to help you make the right decision. As pointed out in the Ombud’s report financial advisors are duty-bound to help clients make choices that will help them see through their retirement in comfort, not financial distress.

  • Tanita Conradie, CFP® professional, is a Financial Advisor at Brenthurst Pretoria [email protected]

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