What to do if your living annuity capital gets depleted

A living annuity is a post-retirement investment vehicle which offers flexibility and control for the retiree. With this flexibility comes risk and the need for proper planning and financial literacy to potentially maximise the growth of the living annuity as well as ensure that it can provide for you for the retirement years. A major worry for many retirees is the thought of outliving their retirement savings.  

10X simplifies your retirement with a straightforward approach, low fees and a superior track record. In this article, we look at what you can do if your living annuity starts decreasing in value too quickly. 

Why capital in living annuities can start to run out  

There are a few factors that may result in your living annuity capital running out during your retirement years. As an investor, you’ll have to be very aware of each of these factors.  

The first factor is a high drawdown rate. The drawdown rate is the percentage of your living annuity that is withdrawn each year as income. In South Africa, your drawdown rate may be between 2.5% and 17.5%. This drawdown rate can be adjusted annually to meet your changing needs over time. If the drawdown rate you have selected is on the higher end of the spectrum, it may result in your funds being depleted too quickly. Whereas a lower drawdown rate allows for more of your returns to be reinvested and potentially grow and provide for your retirement.   

Our panel of experts discusses living annuities, sustainable drawdown rates, offshore investing, and everything else one might need to consider to ensure a comfortable retirement. Read more

Another key factor which may result in your living annuity depleting too quickly is a poorly selected asset allocation. As an investor with 10x, you can customise your underlying investment portfolio by choosing from a selection of carefully curated investment funds. You ideally want a diversified portfolio that aims for good long-term returns that can outpace inflation by a healthy margin.  

Market volatility may also result in your capital losing value and your living annuity running out of capital at a quicker rate than expected. Unlike life annuities, living annuities do not guarantee income, and so the investment risk lies with you, the investor. 

Step 1: Reassess your drawdown strategy 

To help preserve your capital, a sustainable drawdown rate is an absolute necessity. In South Africa, a good rule of thumb is to consider a drawdown rate of around 4% in order for drawdowns to be sustainable and not put too much pressure on your investment capital. A drawdown rate of more than that may put pressure on your living annuity capital over the long term and make it more difficult for your living annuity to last throughout your retirement years. Of course, this also depends on your investment returns and time horizons.  

You can adjust your drawdown rate annually, before the policy anniversary date. If you require more income for a particular year, you may wish to increase your drawdown rate. On the other hand, if your income needs have decreased for a particular year, you might consider decreasing the drawdown rate. You can also select the frequency of your income payments, choosing to receive payments monthly, quarterly, biannually or annually, depending on your requirements.  

If you do find that your living annuity is starting to run low, one of the first adjustments you may consider making is to reduce your income drawdown rate. This allows for more of the returns to be reinvested and potentially grow your capital over the long term, so that it may provide for your retirement years. 

Evaluate your asset allocation  

You should also regularly review and evaluate the asset allocation of your living annuity. Remember, you have the freedom to adjust your portfolio by choosing from a selection of investment funds, each with a different asset allocation. The asset allocation of a fund is the mix of underlying assets that your living annuity is invested in. The assets are usually a mix of equities, bonds, real estate, and cash, both local and offshore.  

When assessing your asset allocation, you want to balance growth and stability within your living annuity. Equities are the most volatile of the asset classes, but may produce the best returns over time. Bonds add more stability to the investment but typically produce lower returns. Cash is the most stable of the asset classes but may produce the lowest returns.  

People who have been retired for a while may prefer a more conservative portfolio with a higher percentage of bonds and cash for stability. A younger person, on the other hand, may prefer a portfolio with a higher percentage of equities to pursue growth. For example, as a newer retiree, your risk tolerance is generally higher, and you may wish to opt for a fund with a greater allocation towards equities.

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  Diversifying across the asset classes is generally recommended, as this allows you to take advantage of market gains in certain asset classes whilst mitigating against any losses in other asset classes. Equities, for example, 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), though past performance does not necessarily guarantee future results. You may also want to diversify your funds both locally and internationally, as this allows you to hedge against any local market instability and depreciation of the rand, while also allowing you to take advantage of any potential market growth in the international markets.  

10X allows for 100% of your living annuity to be invested offshore. This may be attractive for investors who have a large portion of their investments invested locally, to add some protection against any instability in the local market. You should look at your risk tolerance, time horizons and income needs when selecting funds for your investment portfolio.  

10X offers a wide range of strategically curated funds within the living annuity wrapper, each suited to different investor profiles and life stages, allowing you to diversify across the different asset classes according to your specific needs. 10X likes to focus on the long-term results and understands that your asset allocation is an important factor in the long-term success of your investment. To find out more about the 10X funds on offer, click here. Fund information correct as of the 24th of May 2025. 

Step 3: Minimise costs – the role of fees and EAC  

The Effective Annual Cost (EAC) is a metric which was established in 2015 by ASISA. This is a standardised measure which allows you to evaluate the costs associated with owning an investment over a one-year period. All things being equal, you would imagine that a higher EAC would result in less of your returns being able to be reinvested, whereas a lower EAC may result in more of your returns being reinvested and potentially grow over time. It’s important, therefore, to choose a service provider with transparent and low fees so you can be sure that there are no hidden costs. Keep in mind that the EAC is just one of many factors when it comes to living annuities. 

There are various fees which you may see charged on your living annuity. These are fees like: 

Administration fees: The fees that are charged for activities related to the administration of the fund, such a tax or compliance. 

Advisor fees: The fees charged by an advisor for their advice and work. This may be both an initial and an ongoing fee. 

Management fees: The fees charged for tasks related to the management of the fund, such as analysis.  

High fees may accumulate over time and potentially reduce the growth of your living annuity over time. On the other hand, lower fees may allow for more of your returns to be reinvested and compound the growth of your living annuity over the long term. 

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%. We will assume the following factors for this example: 

• 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. 

In the above, we can clearly see that over time, fees can quickly compound. As such, the importance of low fees should be emphasised. Note that this example is for illustrative purposes only, and actual results may vary. 

10X looks to minimise the fees that we charge by making strategic use of index tracking. We aim to keep more of your funds invested to potentially gain from compound growth over the long term. Our fee schedules are available on our website or from our investment consultants. Get in touch if you would like to find out more from the experienced and helpful investment consultants here.   

Step 4: Consider index tracking vs. active management 

Index tracking refers to the tracking of a particular benchmark index, such as the S&P 500, to generate returns that are similar to those of that particular benchmark. Compared to active investment management, where a fund manager is aiming to pick the right stocks in an effort to obtain the best returns possible, index tracking is potentially more cost-effective as there are fewer costs incurred with this process. Active investing generally incurs more costs due to its related activities such as research, analysis and the buying and selling of stocks, which occur in an effort to reach better returns. This could then result in higher overall costs, with these then being passed onto the investor.

Data from the SPIVA Scorecards suggests index tracking outperforms active management most of the time. According to the latest SPIVA South Africa Scorecard (as of 31 December 2024), 60.84% of South African actively-managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten years ending 31 December 2024.   

10X’s investment strategy uses index-tracking to keep costs low, whilst also using a more active approach to asset allocation. Our investment strategy is one which takes the long-term view and focuses on long-term results. To read more about our investment strategy and how we keep fees low, click here.  If you would prefer to speak to one of our experienced investment consultants to find out more about 10X’s strategy and what we have to offer, get in touch here, at no cost to you. 

Step 5: Apply the Golden Equation for retirement capital  

A key framework to consider when evaluating your living annuity is the Golden Equation. This is stated as follows: Drawdowns + Fees + Inflation ≤ Return on Investment.   

Balancing these factors may result in your living annuity being more sustainable and lasting through your retirement years. A high drawdown rate would deplete capital more quickly than a lower drawdown rate, and high fees would mean that less of the returns are able to be reinvested to compound and grow compared to lower fees. You can’t control inflation, but this still impacts the real returns of your investment.   

Ideally, you would want investment returns to exceed drawdowns, fees and inflation to aim for capital growth over the long term, but this will not always be possible. While this framework can help guide your retirement planning, it's key to remember that investment returns can fluctuate and nothing is certain. To read more on the Golden Equation, follow this link. 

Alternative options if your capital is shrinking

If you have made necessary adjustments to your living annuity and you still find that your capital is depleting too quickly, you may need to look at other options. Other options that you may consider are:  

1. Doing a budget and highlighting areas where you may be able to reduce your living costs. 
2. Looking at ways to earn income (e.g. renting a room in your house, part-time work) to help boost the amount of money that you are getting in. 

To prevent further losses, it’s important to be proactive and to take action sooner rather than later.  

Conclusion: Living annuity capital depletion  

By regularly reviewing and monitoring your living annuity, you can be sure you are up to speed with the status of your investment. If you have begun to eat into your investment capital, it’s important to take action to slow this process down, and hopefully, stop it entirely. As you have seen, there are various ways in which a retiree can adjust their living annuity to help preserve and ideally grow the capital over the long term. 

At 10X, we offer low fees, a transparent investment approach, and a superior track record. To learn more about the 10X Living Annuity, feel free to reach out today!