after-retirement

Why index tracking is ideal for long-term retirement planning with living annuities

1 July 2025

Index-tracking (also known as passive investing) is about buying a piece of the market, as opposed to individual stocks. But why is it a solid strategy for retirement with your living annuity?

One challenge that you’ll have to face during your retirement is ensuring that your living annuity can provide for you throughout your retirement years. A living annuity is a long-term retirement savings investment vehicle that may see a life span of 20 to 40 years. This is a substantial amount of time where you will need to rely on your living annuity to serve as your primary income source.  

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A living annuity allows you to invest your savings while also drawing an income from said savings. In order to help ensure that your living annuity is sustainable, you need to focus on both investment growth and income stability. By making use of an investment strategy such as index tracking, you may end up saving on costs, which can potentially maximise your living annuity’s sustainability over the long term. This article will delve deeper into living annuities and highlight the benefits of index tracking as an investment strategy. 

What are living annuities, and how do they work?  

A living annuity is a flexible post-retirement savings investment vehicle which allows you, the retiree, to adjust both your income drawdown rate and the underlying funds of your investment. The income drawdown rate refers to the percentage of your investment that you are drawing each year as income. This drawdown rate may be between 2.5% and 17.5%, depending on your needs and income requirements. This rate can be adjusted each year prior to your policy anniversary date. You can also select the frequency at which you receive these payments. They may be monthly, quarterly, biannually or annually, depending on your preferences.  

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The underlying funds in which the capital is invested may also be switched or changed depending on your risk tolerance levels, income requirements and time horizons. The underlying funds are essentially the mix of different asset classes within which the capital is invested. These may be equities, bonds, real estate (property) or cash. Your living annuity’s asset allocation plays an important role in the growth of your living annuity, so this should be regularly reviewed and carefully assessed.  

As a retiree, you need to be responsible for managing your drawdown rate and the underlying funds to ensure that your living annuity is sustainable and can provide for your retirement years. 

The case for long-term investing in retirement  

The long-term growth of your living annuity is essential if it is going to last through your retirement years, which typically can span from 20 to 40 years. Investors often use the Golden Equation as a guideline.  

The Golden Equation is an important principle which can be a means of managing your living annuity and help your savings last through your retirement years. Of course, returns can fluctuate and can never be guaranteed, so this equation is merely a guideline. The Golden Equation is stated as follows: Investment Returns ≥ Inflation Rate + Fees + Income Drawdown 

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You ideally want your investment returns to be equal to or greater than the sum of the inflation rate, as well as the fees that you are being charged and your income drawdown rate. Remember, inflation is something that you won’t have control over, so you need to focus on getting good investment returns, minimising fees and maintaining a sustainable drawdown rate to help maximise the longevity of your living annuity. You’ll find that providers who use an index tracking investment strategy often charge much lower fees.  

What is index tracking? (And why it works)  

Index tracking involves the mimicking of a particular index, such as the S&P 500, to match the returns generated by the index. Index-tracking has sometimes been called ‘passive investing’. There are fewer costs involved with this investment strategy as there are fewer related activities such as research, analysis and trading costs, making it more cost-effective. An active management strategy on the other hand, is where a fund manager chases the best returns, and included in this approach is more research, analysis and the buying and selling of securities. Due to these activities, there are more costs involved, which may then be passed onto you, as an investor.  

You may find higher fees being charged for the fund manager’s stock-picking expertise. This approach may also not always produce the desired results, as data from the SPIVA Scorecards suggests, index tracking may outperform 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-year period ending 31 December 2024.  

10X makes use of index tracking, which allows us to be more cost-effective with the fees that we charge. We take a more active approach to asset allocation and always focus on the long-term returns that our clients deserve. To find out more about our investment strategy, follow this link. 

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Why index tracking is a natural fit for living annuities 

The lower fees associated with index tracking may mean that there are more returns available to potentially grow and compound over time. This investment strategy also allows for diversification across the asset classes and the potential benefits which come with this. Diversifying across the asset classes means there is exposure to the different assets such as equities, bonds, real estate and cash.  

You can also diversify offshore and across different industries. Index tracking may also allow you to avoid any potential risks that come with poor fund manager decision-making. There are also fewer behavioural risks associated with index tracking, as index tracking is focused on consistency, meaning you are far less likely to encounter emotional decision-making or knee-jerk reactions.   

The role of fees: How index funds help preserve capital 

Fees play an important role in the overall growth of your living annuity over the long term. Lower fees allow for more potential growth of your capital when returns are potentially compounded over time, whereas higher fees may mean less growth of your savings, which will in turn affect the growth of your capital over the long term. The Effective Annual Cost (EAC) of an investment refers to the fees and costs which are associated with owning an investment over a one-year period of time.  

It is a standardised metric which was introduced by ASISA in 2015. It allows you, as an investor, to assess and compare the fees and costs that you are paying, and use this information to compare with the fees and costs associated with other service providers.  

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Effective annual cost calculator

All factors being equal, a higher EAC will mean that there are less returns available to be reinvested and allowed to potentially grow and compound over the long term. A lower EAC, on the other hand, will mean that there are more returns available to be reinvested and potentially compounded over time. You should be able to see your EAC on your statement. If not, you can request your EAC from your service provider.  

10X offers a handy EAC calculator as a part of our suite of free online tools. The EAC calculator can be found here. Our EAC calculator allows you to see the costs and fees associated with 10X products, and then this information can be used to compare with the fees and costs charged by other service providers. The EAC generally consists of the following fees: 

Management fees: These are the fees associated with all tasks related to the management of the fund. 

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

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

Other fees: These are charges such as early exit penalties (applicable to certain products). 

Let’s look at an example to illustrate 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 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 this example shows, there is a substantial difference between the final, real investment values after compounding over 30 years, highlighting the importance of low fees. As mentioned, index tracking strategies are generally more cost-effective as they follow a set index, which means that there are fewer management costs involved. This example is for illustrative purposes only, and actual results may vary. 

Managing risk through diversification and time 

Index-tracked funds can offer diversification across asset classes, industries and geographical locations. When we refer to asset classes, we mean the mix of different assets such as equities, bonds, real estate and cash which your living annuity funds are invested in. This is also called the asset allocation of the living annuity. By diversifying across the asset classes, you can take advantage of the potential good returns experienced in certain classes while mitigating against losses which may occur in other asset classes. As an investor with 10X, you can customise your underlying investment portfolio by choosing from a selection of carefully curated investment funds, which allows you to diversify across the asset classes. 

Equities are the most volatile of the asset classes but may generate the best returns over the long term. Bonds and cash add stability to a portfolio but may generate the lowest returns. You should choose an underlying investment portfolio according to your risk tolerance and investment time horizons. The same can be said for diversifying across different industries and geographical locations, as is the case for diversifying across the different asset classes. For example, South Africans may wish to diversify offshore to hedge against any local market instability or depreciation of the Rand. The South African market is relatively small, making up just under 1% of the global stock market capitalisation, so it is understandable that an investor may wish to tap into the international market for any potential good opportunities and returns offshore. Diversifying across different asset classes, industries, and regions can help you potentially obtain returns that last throughout your retirement years. 

10X offers a range of different funds within the living annuity wrapper. The carefully picked funds each have a different asset allocation, which is tailored to different investor profiles and investor time lines. We also offer a 100% offshore living annuity, which many other service providers are not able to offer due to their own offshore investment limitations. This may appeal to investors, especially those who already have a portfolio that is heavily denominated in Rands. 

A popular fund offered by 10X is the 10X MSCI World Index Feeder Fund. It is 100% offshore and will allow you exposure to 23 developed markets around the world. It is a passively managed investment fund which tracks the performance of the MSCI World Index, allowing the investor to potentially benefit from the growth of the global equity markets. To find out more about this fund as well as the other funds available to you via 10X, follow this link

Conclusion: Living Annuities and Index-tracking   

Living annuities are long-term retirement savings investments, so focusing on sustainability, cost-reduction, and capital growth is key. Index tracking allows for costs to be minimised and more returns to be reinvested and potentially compounded over time, thus making it a suitable strategy for use in living annuities.  

As a retiree, you should therefore consider index tracking strategies when planning your living annuity as a means by which to potentially optimise capital growth and minimise costs. At 10X, our living annuity is transparent and cost-effective with a focus on generating excellent long-term returns.  

10X Investments believes in low fees and a straightforward investment approach. To find out more about our living annuity, follow this link or speak to our knowledgeable and helpful investment consultants here. 

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