Behavioural biases impacting living annuity decisions

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A living annuity is a retirement investment product that provides retirees with an income, and occasionally, behavioural biases can influence decisions surrounding it. Behavioural biases describe irrational patterns people often display in financial decisions, particularly in retirement, where choices are driven more by emotion than by logic. A common example of this could be a knee-jerk reaction, such as panic selling during a market crash.  

The responsibility of managing a living annuity lies with the retiree. In particular, factors like drawdown rates and asset allocation can be adjusted and, therefore, need to be managed. This can lead to a greater likelihood of behavioural bias creeping in, unlike with a guaranteed annuity, where there is no investor input required. In this article, we take a look at behavioural biases impacting investment decisions and the key factors to keep in mind when managing your living annuity.  

What is a living annuity?  

A living annuity is a flexible post-retirement investment vehicle where the retiree can withdraw a regular income while the capital remains invested. As an investor, you can select your drawdown rate, which is the percentage of the total value of the living annuity that is drawn as income each year. This can be a rate of between 2.5% and 17.5%. The drawdown rate can be selected each year before the policy anniversary date.  

You can also adjust your living annuity’s underlying portfolio and choose from a selection of funds, each with a different asset allocation. The idea is to invest in a fund whose asset allocation is aligned with your retirement goals, time horizon and risk profile. The responsibility is with you, as the retiree, to ensure that both the drawdown rate and asset allocation are effectively managed. Finding the right balance potentially ensures both growth and sustainability of your annuity through your retirement years.  

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The role of behaviour in retirement income decisions 

Decision-making during retirement can often be based on emotions instead of on rational assessments, but this can lead to decisions that you may regret. Understandably, retirement can be an emotional time for various reasons.  

Firstly, you might not be earning a salary, or have significantly reduced supplementary income outside of your annuity income. Secondly, there is uncertainty around how long you need your capital to last, and what the future may hold for you as a retiree. Thirdly, there may also be fear around health and medical expenses, as things can change quickly in your older years.   

Emotional decision-making can have a detrimental effect on your living annuity. Fear is a powerful emotion, and it can be a big driver of poor decision-making. This, in turn, can lead to panic selling during a market downturn, poor asset allocation choices, and not meeting financial goals, amongst others.  

When you’re aware of these emotional influences, you can take the steps to guard against any impulsive decisions and stay focused on your overall financial plan. Understanding how emotions can impact decisions is the first step to making more rational and disciplined choices.  

Key behavioural biases that affect living annuity outcomes 

There are plenty of behavioural biases that can impact retirement outcomes. Staying aware of these biases can help you avoid making similar mistakes. Here are a few of the most common biases that we see influence investment decisions:  

Loss aversion  

People often have a deep fear of their annuity losing value. Often, a market dip or crash results in investors panicking and selling. If not panic selling, investors may switch out of equities into more stable asset classes such as bonds or cash. Investors may then take years before moving back into equities, or they may even decide to stay invested in cash or bonds. This kind of action may result in losses being ‘locked in’ and, in the long run, potential underperformance of the capital.  

 When the market rebounds, as history tell us it always does, would you not want to have your savings invested to advantage of this market recovery? Missing out on these upward swings can reduce the long-term growth of your living annuity, as markets often recover faster than expected. Unfortunately, loss-aversion makes the short-term pain of seeing investment values fall feel a lot greater than the long-term benefits of staying invested. As such, we see some investors accidentally sacrifice future income stability for a temporary emotional comfort.    

Recency bias 

Investors are also often swayed by recency bias. This is a bias that favours recent events over events that happened further back in history. It is the idea that a recent event will occur again soon, and the result of this can be poor decision-making. This can cause people to overestimate the likelihood of a market downturn repeating and act too conservatively with their decisions.   

In times like this, you should stick to your financial plan and financial goals. As an investor, you should not be influenced by short-term market volatility. It’s important to go back to the basics and remember that investing is for the long term. Staying disciplined can help you maintain retirement savings that continue to grow and support your income needs over time.  

Inertia 

Inertia occurs when an investor fails to make any changes to their investment portfolio. This could be because of fear or being faced with too many options. Sometimes, investors fail to make changes purely because the process feels too overwhelming, and they feel that doing nothing is safer than making a wrong choice.   As an investor, you should review your living annuity at least annually. You should review your drawdown rate to ensure it remains aligned with your income needs and is still sustainable in the long term. You should also evaluate your asset allocation and ensure that this is still aligned with your investor profile. 

Confirmation bias 

Confirmation bias is when we hold a particular view on an issue and proceed to seek out information that confirms our perspective, rather than considering all the different viewpoints. This presents a one-sided outlook, which may lead to poor investment decisions. For example, it may result in investors avoiding diversification across the asset classes. They may instead invest predominantly in one particular asset class, which could then result in the investor taking on more risk than would otherwise be the case.  As an investor, you always need to consider alternative viewpoints and challenge your own assumptions. To do this, you have to seek out balanced information and regularly review your investment strategy. When you actively question your own initial perspective, you can make more informed investment decisions.  

Consequences of emotional investing in retirement  

Emotional investing in retirement can greatly affect the growth and sustainability of your living annuity. Let’s have a look at some of the consequences of emotional decision-making in retirement:  

• Reduced sustainability: Emotional reactions like panic selling or a higher drawdown rate can deplete your capital quicker than you were expecting, increasing your risk of running out of money during retirement.  
• Forced reduction in lifestyle: In an attempt to preserve funds, you may be compelled to cut back on your standard of living, which can affect your quality of life in your later years.   
• Missed growth opportunities: When you react to short-term market fluctuations and fail to consider the long-term plan, you may miss out on potential opportunities for growth of your capital, as you may end up missing out on the benefits of a market recovery and the power of compound growth.  
• Locking in losses: When you fail to stay invested through market volatility, you end up locking in losses instead of being able to take advantage of a potential market rebound. This can permanently reduce your portfolio’s growth potential.  

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Why index tracking supports behavioural discipline  

Index tracking is a powerful strategy that can be used to support behavioural discipline. Index tracking is when a particular benchmark index is tracked in order to try and match the returns on that index.   

Active management, on the other hand, is when the fund manager aims to pick the winning stocks or tries to time the market. Here, you may see more costs involved, as there is more research, analysis and buying and selling. This may mean higher costs for you, as the investor.   

Index tracking removes the need for any market timing, as well as the need for a manager to select the winning stocks. It also means the risk of any manager-imposed underperformance is removed. Both these aspects of index tracking support behavioural discipline and ultimately help to avoid any emotional decision-making.  10X uses an index tracking investment strategy with a more active approach to asset allocation. This also allows us to keep fees on the lower side whilst focusing on long-term returns for clients. Learn more about our investment strategy here.  

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Reviewing your asset allocation and drawdown rate 

It’s important to stay engaged with your living annuity, avoiding inertia, and regularly reviewing investments. In particular, you should review both your fund’s asset allocation and your drawdown rate to make sure that both still suit your financial needs and align with your retirement plan. The asset allocation of a fund is usually a mix of equities, bonds, real estate and cash, as well as offshore investments.   

The fund that you choose to invest in depends on your investor profile, which includes both your risk tolerance levels and your time horizons for your living annuity. Keep in mind that a living annuity is a long-term investment which may span anything from 20 to 40 years.   

Equities are viewed as the more volatile of the asset classes, but they may also generate the best returns over the long term. Real estate can also generate good returns and serve as a good hedge against inflation. Bonds and cash may both add some stability to a living annuity. Cash is the most stable of the asset classes, but also likely to generate the lowest returns.   

If you are a more risk-tolerant investor, you may choose to include a greater percentage of equities. On the other hand, as a more risk-averse investor, you may include a higher proportion of bonds and cash for stability. You would also look to diversify your savings across the different asset classes. This allows you to take advantage of the different economic cycles. It also helps to mitigate against potential losses in certain asset classes, thereby reducing your risk. In addition, investing offshore can help to protect against volatility in the South African market and the potential depreciation of the Rand.  

As mentioned, your drawdown rate should also be reviewed and adjusted before the policy anniversary date to suit your income requirements for that year. Financial experts generally consider a drawdown rate of 4% to be sustainable, but nothing can be guaranteed. If you can select an even lower drawdown rate without sacrificing your lifestyle, this is generally advised. You can also choose how often you receive your income payments; annually, biannually, quarterly, or monthly, depending on what suits you.  

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At 10X, we offer low fees and a superior track record. We have a number of funds on offer at 10X, each of which has been carefully selected and structured with different investor profiles in mind. There is also the option to invest your living annuity 100% offshore, which may be an attractive option for an investor with a portfolio heavily invested in the local market. Please visit our funds page to see the most up-to-date information on our funds. Fund information is correct as of the 19th of August 2025. 

The impact of fees 

The impact of fees is a major factor to keep in mind. You may find that higher fees mean there are fewer returns available to be reinvested and potentially compounded over time. Lower fees may mean that you have more returns on hand to potentially grow and take advantage of compound interest over the long term.  

As an investor, you should always be aware of the Effective Annual Cost (EAC) of your investment. This refers to the total costs of owning an investment for a one-year period of time. It is a metric introduced by ASISA as a way for you, as an investor, to compare and evaluate the costs of your current provider with those of a different service provider. The typical costs that you may see contributing to your EAC are as follows: 

Advisor fees: The fees charged by an advisor for financial guidance and any subsequent services. There is usually an initial and an ongoing fee charged. 

Administration fees: The fees charged for all administration-related tasks, such as compliance and tax.  

Management fees: The fees charged for the management of the fund. 

Other: There may also be other applicable fees and hidden costs.  

All factors being equal, a higher EAC may mean that there are fewer returns available to be reinvested and potentially grow. A lower EAC may result in more returns available to be reinvested and potentially grow over the long term. However, the EAC is just one factor to look at when comparing and choosing between different service providers. 

Let’s take a look at a quick example to highlight the importance of fees:  

We will compare 1% in fees to 3% in fees, assuming the following:  

• Initial investment: R500,000 
• Investment period: 30 years  
• Return: 12% per annum 
• Inflation: 6% 

Scenario 1 (1% in fees): Real investment value is approximately R1,993,000  

Scenario 2 (3% in fees): Real investment value is approximately R1,154,000 

We can see that just a 2% difference in fees is equal to a difference of R839,000 in the long term, highlighting the importance of fees. Note that this example is for illustrative purposes only, and real results may vary. Learn more about the importance of fees here.  

At 10X, we like to keep our fee structure simple and easy to understand for all investors. Our fees are transparent and cost-effective. We charge 1% or less on most retirement products, and there are no hidden costs to be concerned about.

Final thoughts on behavioural biases affecting your living annuity  

In conclusion, a living annuity offers you flexibility in areas like asset allocation and drawdown rate, but with this flexibility comes responsibility. Behavioural biases can have a big impact on the long-term performance of your investment. As a result, you need to ensure that your living annuity is regularly reviewed while ensuring you stick to its long-term financial plan.  

By staying aware of these potential behavioural pitfalls, you are less likely to fall victim to them. Avoiding emotional decision-making can help you set yourself on the right track for investment growth and sustainability through your retirement years. Get in touch with our investment consultants today to learn more about our living annuity options. At 10X, we help you retire your way!