How often should you review your living annuity drawdown rate?

A living annuity is a long-term post-retirement product that allows your retirement savings to remain invested while you draw a regular income from the capital. The invested capital will have originally come from one of the various retirement products, such as a retirement annuity or preservation fund, upon retirement, set at age 55 in South Africa.   

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As a retiree, you have the freedom to select your drawdown rate within your living annuity. The drawdown rate is key to the sustainability of your living annuity and how long the capital will last. You can adjust your drawdown rate once per year before the policy anniversary date.   

10X helps you simplify your retirement with low fees, a straightforward investment approach and a superior track record. In this article, we will look at your drawdown rate in more detail, and in particular, how often to review your drawdown rate and when to adjust it. 

Understanding living annuity drawdown rates  

The drawdown rate is the percentage of your living annuity that you withdraw as income each year. Currently, you can choose a drawdown rate of between 2.5% to 17.5% per annum. A higher drawdown rate may result in your capital being depleted too quickly. A sustainable drawdown rate is thought to be around 4%, meaning that that rate your capital has a good chance of being preserved and even potentially growing. When looking at the growth and sustainability of your living annuity, you need to factor in your investment returns, drawdown rate, inflation rate and the fees that you are paying on your living annuity.   

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You ideally want to see your investment returns as equal to or greater than the sum of your drawdown rate, inflation rate and the fees that you are paying on your living annuity to see further growth of your capital. This is known as The Golden Equation, and it is a good principle to look at when trying to set up a sustainable living annuity, while remembering that returns cannot be guaranteed. The Golden Equation can be written as follows:

Investment Returns ≥ Income Drawdown + Fees + Inflation  

Why regular reviews matter  

As a retiree, your financial circumstances are rarely static. Income needs, inflation rates, market performance and fee structures can all shift over time. As such, you want to regularly review your living annuity to make sure that it still meets your existing needs. When reviewing your living annuity, you want to ensure that:   

• Your capital is not being depleted too quickly 
• Your drawdown rate reflects current inflation trends and market conditions 
• Your income remains in alignment with your lifestyle and financial requirements. 

If need be, you can then adjust your drawdown rate to cater for any of these changes. Regular reviews ensure that your living annuity still aligns with your income needs, lifestyle, financial goals and your retirement plan. 

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If you need help with structuring or adjusting your living annuity, feel free to contact the experienced and helpful investment consultants at 10X, who will be more than happy to assist you with any queries that you may have, at no cost to you. 

When should you review your living annuity drawdown rate?  

Ideally, you should look to do a comprehensive review of your living annuity annually, before your living annuity’s anniversary date. All income drawdown rate changes need to be submitted prior to your policy anniversary date in order to be actioned for the following year.  

In addition to an annual review, you should also reassess your living annuity whenever you have gone through significant life changes that may affect your income needs, lifestyle or financial goals. By regularly reviewing your living annuity, you’re making sure that it remains in line with your evolving circumstances.  

Key factors to assess during a drawdown review  

Reviewing your living annuity is about making sure that your retirement plan still supports your lifestyle, financial needs and peace of mind. When reviewing your living annuity and, in particular, your drawdown rate, there are a few key questions to ask yourself. 

1. How has your portfolio performed over the last year, 3 years and 5 years?  

Review how your investment has performed to determine if it’s meeting your expectations. If you notice that your returns are falling short, perhaps it’s time to consider re-visiting your drawdown strategy, or consider other fund options, or even another provider entirely. This is especially important if you’re drawing more than your investment is earning.  

2. Is your income keeping up with inflation and rising living costs?  

Did your living annuity outperform inflation? How has your cost of living changed over the last year? Inflation directly affects your purchasing power. Even with a stable income, you may be able to afford less over time. You may want to increase your drawdown rate to meet the rising costs of groceries, medical expenses, utilities and more.  

3. Are your fees still transparent and competitive?  

Have any of the fees charged on your living annuity increased? High fees can lead to reduced retirement savings, and it’s important for you to regularly review your Effective Annual Cost (EAC). If you notice that your provider has increased its fees or your portfolio is performing poorly relative to its cost, it may be time to explore more cost-effective options.  

4. Have there been any changes in your health or life expectancy?  

You need your living annuity to last you throughout your retirement years. This means that your expected lifespan plays a major role in how long you need your capital to last. If you’ve experienced significant changes in this regard, you may need to adjust your drawdown rate to either extend your income or improve your quality of life.  

5. What are your cash flow needs? 

Have you had any changes in your income requirements? For example, are you planning a big trip, or have your monthly expenses been reduced? If your financial needs have shifted, you may need to adjust your drawdown rate to suit them.  

How to adjust your drawdown responsibly  

When adjusting your drawdown rate, the aim is to select a sustainable rate that lasts you throughout your retirement years. The key is to strike a balance between your current income needs and the preservation of your capital for the years to come. As mentioned above, research supports a sustainable drawdown rate of 4% but it depends on your age, health, investment returns and expected longevity.  

You may also want to consider reducing your drawdown rate temporarily after market corrections. This may give your portfolio a chance to recover, grow and potentially compound more of this growth over time. This can improve the long-term value of your investment and improve your chances of maintaining a sustainable income throughout retirement.  

On the other hand, you may need to increase your drawdown rate to meet the rising costs of living. Only do this cautiously and after reviewing your fee structure and fund performance. You can only adjust your drawdown rate once per year, so planning ahead is incredibly important. Use an EAC calculator and always review your latest statements before making adjustments. Small, informed adjustments tend to work much better than big, dramatic changes.  

Reviewing your living annuity asset allocation 

While reviewing your living annuity drawdown rate, it is also important to review another key element of your living annuity: your asset allocation. The asset allocation is the mix of equities, bonds, real estate (property) and cash in which your funds are invested in. As an investor, you have the freedom to choose from a selection of carefully curated investment funds with diversified asset allocation, each fund geared towards different investment goals. You select your fund according to factors such as your risk tolerance levels and time horizons at play. The more risk-tolerant investor would be happier to deal with market volatility and potential losses, whereas a more risk-averse investor would try to protect themselves against market volatility and any potential losses.  

A more risk-tolerant investor is also more likely to include more equities in their portfolio. Equities are the most volatile of the asset classes but may realise the best returns in the long term. We see that they have historically produced returns above inflation, by around 7% annually over the long term (based on JSE All Share Index performance versus CPI from 1960-2020); however, past performance does not guarantee future results.  

Bonds add stability to a portfolio, but they may generate lower returns. Real estate may also generate some good returns, as well as be a good hedge against inflation. Cash is very stable but is likely to generate the lowest returns of all. Diversifying across the asset classes allows the investor to take advantage of any potential gains in certain asset classes whilst protecting against any potential losses in other asset classes. You may also wish to consider diversifying your portfolio offshore. This may allow you to take advantage of good returns on offer in the international market whilst also helping to protect against any potential local market volatility and depreciation of the Rand.  

When reviewing your asset allocation, you always want to ensure that your mix of assets is still aligned with your financial goals and retirement plans.  

10X offers a number of different funds with a different mix of assets within the living annuity wrapper. Each of these funds is suited to a different investor profile and risk tolerance. The funds have been carefully selected to get superior returns for our clients. Let's briefly look at some of the 10X funds.  

10X Your Future Fund: The 10X Your Future Fund is our flagship offering and has been carefully designed to deliver cost-effective exposure to a wide range of local and international asset classes. The fund has a higher allocation to growth assets, equities and property, and is best suited for investors who want long-term capital appreciation to build wealth. Local exposure is set at 63.4% and offshore exposure at 36.6%.  

10X Income Fund:  The 10X Income Fund is carefully constructed to provide investors with a high level of income and long-term capital stability. This fund achieves its objectives through cost-effective exposure to a diverse range of local and international interest-bearing assets. While returns may fluctuate over shorter periods, the 10X Income Fund is well-suited for investors with a time horizon of 3 years or longer. It is designed to deliver a high level of income, with a current 12-month forward yield of 9.8%, and aims to provide long-term capital stability, making it suitable for investors seeking to preserve their wealth.  

10X Moderate Fund: The 10X Moderate Fund is suited to investors who want capital growth with a lower level of volatility than a high equity portfolio over the medium to long-term. This is achieved with cost-effective exposure to different local and international asset classes. The portfolio has a higher allocation to growth assets than to defensive assets, and the recommended time horizon is three years. Local exposure is at 67.7% with offshore exposure at 32.3%. 

10X Defensive Fund: The 10X Defensive Fund is best suited to investors who want a steady level of income alongside capital growth at low volatility over the medium-term, achieved via cost-effective exposure to local and international asset classes. The portfolio has a higher allocation to defensive assets than to growth assets, and the recommended time horizon is 1-3 years. Local exposure is set at 73.1% with offshore exposure of 26.9%.  

Reviewing your living annuity fees 

It’s also important to review your fees when doing a review of your living annuity drawdown rate. Higher fees may result in less of your returns being available to be reinvested to potentially grow and compound over the long term. Minimising fees can result in higher returns over the long term. 

The Effective Annual cost (EAC) was established by ASISA in 2015. This allows an investor to see the total fees and costs associated with owning an investment over a one-year period of time. All things being equal, a lower EAC may allow for more returns to be reinvested and allowed to compound and grow over time. A higher EAC may mean that there are less returns reinvested and allowed to potentially grow over the long term.  

Let’s look at some of the typical fees which you may see charged on your living annuity: 

Administration fees: These are the fees charged for the administration of the fund. This could be for tasks related to compliance, reporting and tax. 

Advisor fees: These are the fees charged by an advisor for their advice and services. There may be both an initial and an annual fee charged. 

Management fees: These are the fees charged for the management of the fund. 

Other: These may be charges such as early exit penalties, which may be applicable to certain products. 

Let’s look at an example to explain the effect of high fees on your living annuity. We will be comparing fees of 3% and 1%. 

Let’s assume the following factors: 

• Investment period of 30 years 
• Investment of R1000,000 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (1% Fees): Real investment value is approximately R3,980,500. 

Example 2 (3% Fees): Real investment value is approximately R2,310,000. 

A difference in fees of just 2% can have an impact on the potential growth of your investment, especially when compounded over time. This example is for illustrative purposes only, and actual results may vary. 

10X offers a range of different products, all with a transparent and cost-effective fee structure. We make use of an index tracking investment strategy with a more active approach to asset allocation. The investment structure allows us to charge lower fees due to the reduced number of activities involved with this strategy. For most of our retirement products, we charge less than 1% in fees on most products. This does depend on the product selected and the amount invested. Please view our website for the most up-to-date fee information.  

Conclusion: Reviewing your living annuity  

As we have discussed, it’s important to thoroughly review your living annuity’s drawdown rate annually, and more regularly when there are changes in your circumstances and income needs or changes in the market. This is to ensure that your drawdown rate is still aligned with your income requirements and financial goals, as well as being sustainable. 

As an investor, you should also review the asset allocation and the fees you are paying on your living annuity to ensure that these are also meeting your expectations.  By reviewing your living annuity annually, you are helping to preserve your capital and potentially extend the life of your capital. 

10X simplifies your retirement investments with low fees, a proven track record of superior returns, and a straightforward investment approach. To learn more about living annuities, or any of our many retirement products, get in touch with one of our investment consultants today!