Living annuities for early retirees: How to stretch income further

A living annuity can play a major role in your years as a retiree, and pre-retirees should seek to understand the core differences between a living annuity and a life or guaranteed annuity. Early retirement is becoming increasingly popular as individuals seek to stop working and enjoy more of their time, perhaps by taking up new hobbies, travelling, or simply relaxing. This trend may lead some people to retire at age 60, while others may even retire as early as age 55 (the legal minimum retirement age). In South Africa, retiring before the age of 60 is generally considered an early retirement.  

A living annuity is a retirement savings investment product which allows you, as a retiree, to invest your retirement funds and, at the same time, draw a regular income from this capital. Living annuities offer great flexibility and control, but with this comes risk, such as the risk of you outliving your capital. This is particularly true for early retirees.  

At 10X, we understand your retirement is unique, and that’s why we have designed our living annuities and their underlying funds to help you potentially maximise your savings. In this article, we will take a deeper look at how to plan your living annuity to potentially maximise its benefits and preserve your capital over a longer horizon. We will look at sustainable income drawdown rates, strategic asset allocation, managing fees and planning for the long term.  

Why early retirement poses unique challenges  

The earlier that you retire, the longer your retirement savings need to last. This essentially puts more pressure on the retirement capital that you have saved. You also need to take into account the effect of inflation over a longer time span, namely the potential that inflation has to erode the purchasing power of your capital.  

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In addition, you need to consider how you are going to prepare for market volatility. You’ll need to determine how risk-tolerant you are and how much of an impact market volatility would have on your retirement savings. In essence, you need to ensure that you carefully plan for your retirement years in order to preserve your capital and reduce the potential stress and worry that may come with a longer retirement.  

Carefully balancing growth and income becomes trickier in early retirement. You still need investment growth to outpace inflation and support your long-term goals, but you also need stability and liquidity to cover lifestyle expenses and income needs. As an investor, you’ll need to make key decisions surrounding your asset allocation, withdrawal rates, and risk tolerance.  

Understanding the mechanics of a living annuity  

A living annuity is a retirement savings vehicle that is designed to provide you with an income through your retirement years, while also keeping the capital invested. It is considered to be a long-term investment, with a span of around 20 to 40 years. Living annuities offer great flexibility with regard to your drawdown rate and fund choices.  

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In South Africa, you can select an annual drawdown rate of between 2.5% and 17.5%, depending on your income needs for that year. The drawdown rate is the percentage of the total value of your living annuity that you draw regularly as income. If you would like to adjust the drawdown rate, you will need to ensure that you amend it before the policy’s anniversary date.  

You can also select the frequency of the payments. You can opt to receive your income monthly, quarterly, biannually or annually, depending on your requirements. Returns on your capital may fluctuate with the markets, and there are no guarantees. It is therefore important to regularly review your living annuity and make adjustments accordingly. 

The importance of sustainable drawdowns 

The importance of sustainable drawdowns should not be understated. By selecting a drawdown rate which is too high, your capital may end up being depleted too quickly. On the other hand, a lower drawdown rate will potentially help for more of your capital to be preserved.  A potentially sustainable drawdown rate is thought to be around 4%. You can find more on the 4% drawdown rule here.  

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This allows for more of your capital to be reinvested and potentially grow, and compound this growth over time. This growth depends on market returns and the longevity of your living annuity. If you can select a drawdown rate of below 4%, you have a higher chance of preserving your capital and allowing your savings to potentially grow. A sustainable drawdown rate is an absolute necessity for early retirees.   

For some people, even the minimum drawdown of 2.5% may be more income than they actually need. If you realise this is the case for you as an early retiree, a strategy to consider would be opening a new retirement annuity and contributing any excess to that. You can later transfer these funds back into your existing living annuity or open a new one if needed. Note that this would be a new retirement annuity and a voluntary contribution, not a product-to-product transfer. This is a strategy for potentially stretching your income over a longer time span. You can learn more about maximising your retirement income here.  

According to the law, at least two-thirds of your retirement savings must be used to purchase an annuity, while the rest can be taken as a cash lump sum, with a portion of this amount being tax-free. You may opt to use this tax-free amount to cover your initial income needs. This can allow you to potentially reduce your drawdown rate in your early retirement years, which can help maintain your annuity’s value over a longer horizon.   H2: Building the right asset allocation for the long haul   

Early retirees also have to be acutely aware of the importance of asset allocation. At 10X, you can adjust your underlying investment portfolio by choosing from a selection of expertly curated investment funds. The funds allow you to diversify across different asset classes, like equities, property, bonds and offshore investments. Asset allocation is the mix of different asset classes in which you may invest your capital. You select your fund according to your financial needs, risk tolerance levels and time horizons. Diversifying across multiple asset classes lets you potentially benefit from different economic cycles, which can improve the performance of your portfolio. Keep the following in mind when selecting a fund:  

• Equities are the more volatile of the asset classes but have the potential to produce the best returns.  
• Bonds are more stable but may potentially produce lower returns. 
• Real estate is less volatile than equities and may be a good hedge against inflation. 
• Cash is the most stable of the asset classes, but you can expect lower returns. 

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Younger retirees may wish to include a higher percentage of equities in their portfolio in an effort to maximise returns. An older retiree may opt for a slightly more conservative strategy and still include equities, but perhaps a higher percentage of bonds to add some more stability. Equities 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.  

Diversifying across the various asset classes is an important consideration for retirees, as it allows for potential gains in certain asset classes while also mitigating any losses in other asset classes. It is also important to consider diversifying offshore in order to manage your risk. This allows for some protection against local market volatility and potential depreciation of the rand. 10X offers a living annuity product which may be invested 100% offshore, which may appeal to some investors. Speak to one of our consultants to learn more.    

At 10X, we offer a range of funds within our living annuity wrapper. These funds are suited for different investor profiles and risk levels while also focusing on long-term results. At 10X, we understand the importance of asset allocation and believe it to be an important factor in the long-term success of your portfolio. We have funds to suit a range of different investor profiles. To find out more about our funds on offer, click here. Fund information correct as of the 27th of May 2025.  

Keeping fees low 

Fees play an important role in the potential growth of your investment. If fees are low, you can reinvest more of your returns, which will then hopefully grow and compound over the long term. However, if fees are higher, this means that less of your returns can be reinvested. This is especially evident over the long term, where returns are potentially diminished and capital value is affected.   Fees will undoubtedly be charged on your living annuity. Let’s look at the kinds of fees that you can expect to see:  

1. Administration fees: These are the fees charged for tasks related to the administration of the fund. This would be for activities related to tax, reporting and compliance and similar. 
2. Advisor fees: These are the fees charged by an advisor for their services. You may see both an initial and an ongoing fee charged. 
3. Management fees: These are the fees related to the management of the fund.  

The Effective Annual Cost (EAC) is a standard metric introduced by ASISA in 2015. It is a measure whereby an investor can see the annual costs of owning an investment and then compare these costs with those of other similar products offered by other service providers. These costs are the various fees we have mentioned, as well as any additional costs such as early exit penalties. Ideally, you want the EAC of your living annuity to be lower, as this would then allow for more of your returns to be reinvested and potentially grow. A higher EAC would allow for less of our returns to be reinvested. Keep in mind that EAC is just one of the factors to consider when choosing a service provider.

This handy EAC calculator is one of our free online tools available for investors. It allows you to view the impact of fees on your capital and compare the EAC of a 10X product with that of a different service provider:   

Let’s look at an example to explain the effect of high fees on your living annuity. We will compare fees of 3% and 1%. Let’s assume the following factors: 

• Investment period of 30 years 
• Investment of R100,000 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (1% Fees): Real investment value is approximately R398,500. 

Example 2 (3% Fees): Real investment value is approximately R231,000. 

As you can see from this example, by choosing a provider with lower fees, you can use more of your returns to stay invested and potentially grow over the long term. We can, therefore, clearly see that low fees are incredibly important for early retirees. This example is for illustrative purposes only, and actual results may vary. Find out more about how fees impact returns here.  

At 10X, we offer transparent and low fees of less than 1% for most products. This is possible due to the passive investment strategies used, which may be a low-cost alternative to providers with more actively managed options. 

Index tracking vs. active investment management 

Index tracking is where a benchmark index, such as the S&P 500, is matched in order to try and get the same returns as the index. Active investing is where a portfolio manager strives to pick the best stocks in order to achieve the best returns. This may result in higher costs, as there is more research, analysis and buying and selling associated with this approach, 

10X can keep our fees on the lower side by utilising index tracking whilst also using a more active approach to asset allocation. Our investment strategy takes a long-term view and focuses on long-term results. To read more about our investment strategy and how we can keep fees low, click here.  

The Golden Equation for retirement income 

The Golden Equation is a framework that looks at the longevity of your living annuity. This is essentially: Drawdowns + Fees + Inflation ≤ Return on Investment  

You ideally want your drawdown, fees and inflation to equal or, even better, be lower than the returns on your investment. This may then potentially result in the long-term sustainability of your living annuity and allow the funds to potentially last you through your retirement years. It’s important to remember, however, that returns do fluctuate and with investing, there are no guarantees.  

Conclusion: Living annuities for early retirement  

Early retirement is possible, but it is important to put strategies in place to ensure that this is carefully planned out so you don’t run the risk of outliving your capital. You need to make sure that these three important factors are regularly considered and reviewed: your drawdown rate, fund choices (asset allocation) and existing fees.  

Your drawdown rate should be sustainable, your asset allocation should be in line with your needs and risk tolerance, and your fees should be as low as possible for you to get the most out of your returns. By reviewing your living annuity annually, you can potentially ensure that you are on the right path for a comfortable retirement.  

At 10X, we have a track record of superior returns at a fraction of the cost. Speak to one of our experienced investment consultants to learn more today!