Living annuity planning: The retirement spending curve and what it means for your living annuity

As a retiree, you may expect your spending habits to remain the same throughout your retirement years, but this may not always be the case and may have an impact on how you manage your living annuity. You may see your spending habits changing as you move through your retirement years. This concept can be illustrated by ‘The Retirement Spending Curve’.

Your spending habits can directly affect the decisions that you make when it comes to your living annuity. This could include decisions around your drawdown rate and asset allocation, which may then have a knock-on effect on the sustainability and longevity of your living annuity. In this article, we will spend some time looking at how your spending habits can change as you move through retirement, and how to manage your living annuity accordingly.

Understanding living annuities

A living annuity is a post-retirement income product, providing flexibility for investors. Your savings are invested in the market while you draw an income from these funds. You are able to select your drawdown rate, which translates to the income that you will receive. Your drawdown rate is the total percentage of your living annuity that you draw as an income.

This drawdown rate may be set between 2.5% and 17.5% per annum and can be amended each year at the policy anniversary date. The policy anniversary date is the date at which your living annuity started. You are also able to select the frequency of payments, to be annually, biannually, quarterly or monthly to suit your preferences. A living annuity allows you to select the underlying funds in which you are invested. These funds can also be switched to match your changing needs over time.

What is the retirement spending curve?

The Retirement Spending Curve is a concept that illustrates typical spending patterns during the retirement years. It shows a higher level of spending in the early retirement years, followed by a decrease in spending and a more ‘stable period’, which may later be followed by an increase in spending.

This final uptick could be triggered by an increase in medical expenses or similar. Spending patterns amongst retirees may vary from person to person, but the retirement spending curve can be a general guideline. It’s worthwhile keeping in mind that your spending patterns during the retirement years may not be linear, and this can be helpful when it comes to planning and managing your living annuity.

Why the spending curve matters for your living annuity

Your living annuity offers flexibility, which is an important consideration when it comes to managing your income and aligning this with changing spending patterns. Your living annuity’s longevity should be a key consideration when it comes to selecting an appropriate drawdown rate.

If the selected drawdown rate is too high, this may mean that your living annuity gets depleted too soon, compared to a more sustainable drawdown rate, which may allow you to preserve more of your capital and result in more potential compound growth over the long term. Financial experts estimate a sustainable drawdown rate of around 4%. If you can draw less, then this would be advisable, as it will only make your savings last longer.

Let’s look at an example to illustrate the retirement spending curve:

In the early years of retirement, you may spend more on travel, hobbies or lifestyle-related expenses, which may lead to a higher drawdown rate. As you move further into retirement, spending often decreases as these activities become less frequent, which may allow you to reduce your drawdown rate and preserve more of your capital.

When you understand this pattern, you can take a more flexible approach to your drawdown rate, adjusting your income over time to better align with your changing spending needs. This will help make sure your savings last throughout your retirement.

The flexibility that comes with a living annuity is great to have, but it does need to be managed carefully. Responsibility for your living annuity lies with you, as the investor.

Asset allocation considerations

Your living annuity also allows for flexibility when it comes to the underlying funds that your capital is invested in within the living annuity wrapper. 10X makes life a lot easier for investors by offering a range of well-diversified funds that can suit a variety of different investors with different investor profiles. These funds will give you access to different assets, as well as local and/or offshore exposure, depending on your preferences and long-term financial goals. Your asset allocation is a mix of the different asset classes. This will usually be a selection of equities, real estate, bonds and cash.

Asset allocation plays the biggest role in the performance of your living annuity, accounting for over 90% of returns, as seminal research from Brinson, Singer and Beebower shows - so this is something to consider carefully. Equities are likely to generate the best returns of the asset classes, but they are also likely to be the most volatile of the assets. Real estate may also provide some good returns while serving as a hedge against inflation. Bonds may produce somewhat lower returns, but they will add stability to your portfolio. Even though bonds are generally seen as a conservative option, they may still outperform expectations. Cash is likely to generate the lowest returns of all the asset classes, while also being the most stable and liquid.

When you are considering your asset allocation, you would want to ensure that this matches your risk tolerance levels and investment timelines. It’s important that your asset allocation aims to beat inflation over the long term, so including some equities in your portfolio may help with this. If your portfolio is too heavily invested in cash, especially in early retirement, this may result in lower growth in the long term.

Diversifying across the different asset classes may be a good way to balance both the risk and return in your portfolio. This could also include diversifying offshore, which may be a good hedge against local market instability and any depreciation of the Rand. A living annuity may be invested 100% offshore as it is not subject to Regulation 28 of The Pension Funds Act.

Please visit our funds page to see the full range of funds on offer.

Fees and your living annuity

Fees are an important factor in the potential growth of your living annuity. Higher fees may affect the returns you have available to reinvest. Lower fees may mean that there are more of your savings to reinvest and potentially grow and compound over the long term.

There are a few fees that you can expect to see deducted. These are the following:

• Administration fees: These are the fees related to the administration tasks. This would be for activities such as reporting, compliance, tax and similar.
• Advice fees: An advisor will charge fees for the services and advice that they offer you. There may be both an initial fee and an ongoing fee charged.
• Management fees: These are the fees for the management of the fund.

Let’s look at an example which will help to illustrate the effect of high fees on your living annuity: We will assume the following for this example:

• Investment amount: R4 million
• Investment period of 25 years
• Drawdown rate: 4% (frequency of payment: annually)
• Return of 12% per annum
• An inflation rate of 6%

Example 1 (0.86% Fees): Real investment value is approximately R4.7 million.

Example 2 (3% Fees): Real investment value is approximately R2.9 million.

A seemingly small difference in fees can have a substantial impact on your living annuity, especially when this is compounded over the long term. This example is for illustrative purposes only, and actual results may vary. You can find out more about how fees impact real investment value here.

You should also check the Effective Annual Cost (EAC) of any prospective fund that you’re considering investing in. This is a standardised metric that was introduced by ASISA in 2015. It allows you to see the total costs and fees of owning an investment over a one-year period of time. All factors being equal, you can imagine that a higher EAC would allow less of your potential returns to be reinvested. A lower EAC will allow for more of your potential returns to be reinvested and grow over time.

It’s important to remember that the EAC is just one factor to consider when evaluating and comparing different investment options. At 10X, you can expect low-cost, simple and transparent fees. Fees on our retirement products are usually 1% or less. This will, however, depend on the product chosen and the amount invested. Please explore our products for the most up-to-date fee information.

Investment strategy choices

At 10X, we make use of a passive investment strategy. A passive investment strategy is when a benchmark index like the S&P 500 is mimicked, with the objective of getting the same returns as this benchmark index. This strategy doesn’t involve many activities, which may mean the costs are kept lower, and there are ultimately fewer fees for you as the investor to pay.

If we compare this to a more active investment strategy, which entails a fund manager who actively searches for the winning stocks, this can involve many more activities, such as research, analysis and buying and selling costs. This may result in higher costs, which could then be passed on to you, the investor, in the form of higher fees. This approach may also not always produce the desired results.

The S&P Indices Versus Active (SPIVA) Scorecards track the performance of actively managed funds against their benchmarks globally. According to the latest SPIVA South Africa Scorecard (as of June 2025), 67.61% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending June 30, 2025.

Common mistakes related to spending patterns

Let’s have a more in-depth look at some of the common mistakes that are made when it comes to spending patterns.

1. Not reviewing fees or paying high fees
2. Not paying attention to your living annuity’s longevity
3. Ignoring inflation and not factoring it into your decision-making
4. Not planning for unexpected expenses or medical expenses
5. Selecting a drawdown rate that is too high
6. Overspending in the early retirement years and not planning appropriately for the later retirement years
7. Not including growth assets in your underlying portfolios to align with your long-term retirement goals and investor profile

Practical steps to align your annuity with your spending

Here are a few practical steps that you can take to align your annuity with your spending:

1. You should always review your income and expenses report to ensure that you are on top of expected expenditure.
2. It’s important to aim for a sustainable drawdown rate. This can be amended where needed, while keeping your living annuity’s longevity in mind.
3. You would also want to review your fees and EAC annually, while ensuring these are kept low.
4. It’s also important to select a strategic asset allocation that aligns with your long-term financial goals and plans.
5. Medical and general unexpected costs, such as car or house repairs, should be planned for as well.

Final thoughts: Living annuity spending

Your spending patterns through the retirement years are very likely to change, so it is important that you are aware of this and can adapt accordingly. Your living annuity offers flexibility, which allows you to cater to these changing spending patterns and align yourself better with your retirement spending curve. An effective living annuity should be properly managed in order to align with changing spending habits.

At 10X, our low-cost and transparent living annuity allows you to easily change your drawdown rate or switch funds to keep in sync with your changing needs and situation. Please contact the experienced investment consultants at 10X for any queries surrounding setting up or managing your living annuity so that it best serves you and where you are in your retirement journey!