Cats, curve balls, and my retirement income options (and yours too, most likely)

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of 10X Investments.

Ah, that beach cottage. What a dream. Sitting there on the wrap-around stoep, typewriter at hand, cat of death on my lap, working on my seventh book because I am no longer the ‘discovery of the century’ but now a top ten South African author. Ok, maybe not the typewriter, because I’m not Wilbur Smith.

Every now and then I travel to book fairs and bookstores to promote my novels. I get into my 4x4 that is so sturdy and reliable it will never break, and head south. I’m everywhere important literature is happening. Me and the cat are red carpet regulars, cover shoot material.

And then I wake up – on the floor because I was waving so hard at my fans that I fell off my futon. Groggily I realise that all of this requires money. Moola. Cash in the bank (or investment account). And that requires being savvy not only with my money now, but also when I retire, because I need to ensure that I can live comfortably.

So, time to get serious and whip out a spreadsheet. Or artificial intelligence, which does maths pretty well (you’ll recall I’ve disclosed that I don’t math before):

Here are my assumptions:

• I am 48 (don’t tell anyone. And I know I don’t look it, thanks!)
• I retire at 70 because I am still writing
• I die at 80 because I have private medical aid and will live longer than the average age for women in South Africa of 70
• I already have R3 million put away
• I don’t win the R93,126,497 Powerball
• I have stopped contributing to my RAs because I had a serious brain fart and it seemed like a good idea at the time
• My current lifestyle is R50,000 in expenses a month

Shew. With average long-term returns of 9% after fees of 0.8%, I’d have around R12 million in the pot at 70. Now, living annuity or life annuity? Let’s run the numbers.

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If I go Living Annuity

A living annuity gives me the flexibility to withdraw more money if life goes pear-shaped (which happens a lot). Markets don’t care about my beach cottage – a bad run early in retirement, combined with drawing down too aggressively, can quietly hollow out a portfolio faster than you’d think. That risk sits entirely with me.

The key number becomes the drawdown rate; how much I pull out a year. At 4%, I only get R40,000 a month, and that’s before tax. Which means I need to pull at least 5% (R50,000 per month), and make some lifestyle adjustments. If I push it to 6%, I have fewer adjustments to make but now the longevity of my capital gets less certain. I know I’m dying at 80, but I’d still like to leave the majority of my living annuity money to my daughter (as this is one of the great benefits of a living annuity – it sits outside of my estate and therefore outside of the tax man’s grasping hands).

Looking at those numbers makes things real, as real as falling of the futon. Markets do what they want, don’t they? And the difference between 5% and 6% is much bigger than it looks on paper. One percentage point sounds tiny. Over a decade or two, and especially if more of those years are bears, it potentially becomes the difference between preserving capital and quietly eating through it.

This is why low fees are so important. Paying under 1% in fees and not paying an advisor on top of it potentially frees up more drawdown capital. And fees are the one other variable (outside of drawdown rate) that I control (market performance and inflation? Yeah, I have very little influence there).

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If I go Life Annuity

This is where I give over all my capital (my R12-ish million) to an insurance company and they guarantee me an income for life. So, there’s no market risk, no investment decisions, no lying awake wondering what the orange gas trumpet did to inflation overnight. With R12 million, a life annuity might pay out anything between R60k and R80k depending on what options I choose (inflation-linked, investment participation etc.). It might even pay out more if I don’t choose an escalation option (but that would feel a bit silly – who knows how expensive things can get if Woolworths corners the confectionary market).

But at least it’s always guaranteed. Every month. Regardless of what the markets do.

But (and it’s a big but) I chose my income once – at the start of retirement. And once it’s set, it’s set. If inflation spikes faster than my income grows, I can’t renegotiate. I can’t adjust. I just have to live with the decision I made on day one, which is a lot of pressure for one decision.

There’s also this: When I die, the insurer keeps the capital. My kid gets nothing from that pot. Not a rand. I really, really, don’t like this idea.

Retirement assumptions... are still assumptions

I’ve excluded several things: tax, costs, stable inflation, the assumption that retirement spending doesn’t escalate dramatically later in life, and any chance of a Ferrari moment in the first flush of retirement freedom. Retirement calculators are assumption engines, not crystal balls.

So, neither option is perfect because both involve trade-offs. With a living annuity, I carry the investment risk and the risk of running out of money. With a life annuity, I give up flexibility, hope my initial choices hold up over time, and it’s ‘Sorry for you’ for my kid.

I could also take a mix of the two. R6m into a living annuity, R6m into a life annuity. Or some other mix. It’s worth considering. Maintain some flexibility, but get some certainty, too. It’s actually very much worth considering.

Importantly, I need to remember that assumptions often make an ass out of u and mptions (I don’t know any mptions, but I apologise if they feel like an ass right now). Behind all of this is the fact that things could just blow up. Either all at once or, as often happens, slowly over time. The cottage needs a new roof, the 4x4 needs a new engine, the fridge packs in, the cat needs several expensive vet visits. You get the idea. The more I think about it, the more I feel flexibility is key. Who knows what the future holds.

So, I’ll chat with someone before I decide. Maybe Brett – hi Brett – who’s at 10X. And then I can run numbers through ChatGPT and decide.