Inflation-proof your retirement with a 10X living annuity

Few financial concerns are more pressing for retirees than ensuring a consistent, stable retirement income that sustains purchasing power as time passes; a living annuity can make a world of difference in this regard.

Many retirees in South Africa lean toward living annuities over life (guaranteed) annuities because of the flexibility they offer, particularly in managing income drawdowns and adjusting investments over the years. With a living annuity, you can adjust your drawdowns to allow a greater percentage of your returns to be reinvested; or you can take more income if you need it. You can actively manage your investment to make sure you keep up with (or even, outpace) inflation and accommodate changing financial needs. In other words, you are more able to respond to changes in the cost of living throughout your retirement.

With a life (guaranteed) annuity, however, the monthly payout is usually fixed based on an initial rate, and this can be a disadvantage as inflation rises and erodes purchasing power over time. Even if the annuity is designed to increase annually in line with inflation, rising prices in other areas can still put pressure on your finances.

So, living annuities offer a lot more flexibility (and you can leave the money in a living annuity to nominated beneficiaries such as you children, which usually isn’t an available option with a life annuity). Ideally, your income drawdown, fees, and inflation combined should not exceed the returns generated by your investment. We call this balance the “golden equation,” and it’s key to preserving your capital over the long term and making sure your retirement income lasts throughout your retirement.

For those who are unsure about inflation and the impact it can have on your retirement income, it can be summed up as a steady increase in the cost of goods and services across the board. As prices rise, the purchasing power of money declines, meaning that what you can buy with a certain amount today may be far less than what the same amount would afford you in the future.

At 10X, we understand the detrimental effects of inflation on retirement income, which is why our underlying funds are intentionally designed to generate consistent returns that outpace inflation by a healthy margin.

In this quick read, we will investigate the many benefits of a 10X Living Annuity, including our low fees and transparent fee structure, and diversification across asset classes that we think provides the best chance of consistently beating inflation. Additionally, we will explore how strategic financial planning and wise investing habits can proactively safeguard investors against the escalating cost of living.

Understand Your Living Annuity: A Quick Overview

A living annuity is a retirement savings investment product that allows you to draw a regular income throughout retirement while keeping your initial savings invested.

As mentioned, a living annuity is distinct from other investment products like life (guaranteed) annuities. A life (guaranteed) annuity provides you with a consistent, fixed income for life. On the other hand, a living annuity allows for ample freedom when it comes to withdrawals (within legislated limits of between 2.5% and 17.5% of the invested amount), investment portfolio management, and the allocation of capital to beneficiaries.

With a living annuity, you are free to adjust your drawdown rate to suit your financial needs as you transition through retirement. If you find yourself with more expenses one year, you can raise your drawdown rate to access more income. In the same vein, if your needs decrease and you’re drawing more money than you need, you can lower the drawdown rate and preserve more of your savings (or, you can reinvest the excess into a retirement annuity, and take advantages of those tax benefits, with the aim of retiring the money in the retirement annuity into your living annuity in time). You can make these adjustments annually and decide how often you want to receive your income (monthly, quarterly, semi-annually, or annually).

Drawdowns are one way the returns from your living annuity investment are depleted (the others being inflation and fees). Inflation is one of the biggest dangers to your retirement savings, so you’ll want to do everything you can to make sure your returns can effectively combat it. This means taking an active and strategic approach to managing your investment, and keeping your drawdowns as low as possible to make sure your savings last throughout retirement.

Another important factor to consider is the fees you pay. High fees can be a drain on your retirement savings, whereas low fees mean more of your money is reinvested and compounding in your favour. Conceptualising the impact of these three crucial factors – drawdowns, inflation, and fees – is where the Golden Equation comes in handy, but we’ll elaborate on this formula further down.

Ultimately, our goal with the 10X living annuity is to make sure the returns we generate build your savings. We do this by making sure our funds are diversified across assets that give us the best chance of outperforming the market (while also making sure any risks are hedged effectively). We also aim to keep fees low with a transparent fee structure, and have experienced investment consultants available to help you understand your options at no cost to you.

Understanding And Applying The Golden Equation

What we call the ‘golden equation’ is a formula that functions as follows: your total expenses, which include drawdowns, fees, and the severity of inflation, should never exceed the overall returns generated by your investment. It looks like this:

Drawdowns + Fees + Inflation ≤ Return On Investment

It is the careful balancing of these critical factors that ensures long-term financial security and income longevity throughout your retirement years.

Understanding Living Annuities And Inflation Risks

In short, inflation is unavoidable and there are certain inflation-related risks that are crucial to remain aware of when it comes to managing your living annuity investment. Due to the ever-rising cost of living, and inflation gradually decreasing purchasing power over time, steps must be taken to maintain your standard of living and bolster your retirement income.

So, how exactly do you go about mitigating inflation-related risks? Well, keeping the Golden Equation in mind, there are three main approaches, and employing all of them can help you safeguard your quality of life in retirement and prevent inflation from overtaking your investment.

Focus On Fees

Firstly, understanding (and minimising) the fees you pay on your investment is integral to ensuring better returns, as high fees will eat into your bottom line and, ultimately, make your living annuity less sustainable in the long run. High fees don’t only affect your returns now, but they compound against you over time. In light of the negative effects of high fees, 10X keeps fees low – typically 1% or less, depending on how much you have invested and the product you're invested in.

Sustainable Drawdowns

Secondly, it is critical to set sustainable drawdown rates – the percentage of your living annuity’s total value that can be withdrawn as income – as this greatly increases the likelihood of long-term sustainability. Read our blog about the 4% drawdown rule to learn more.

Diversified Asset Allocation

Finally, by carefully selecting and regularly reviewing (and adjusting, if necessary) your mix of assets, you can better manage market fluctuations while ensuring your portfolio continues to meet your income goals. An effective asset allocation strategy not only aims for steady growth but also tries to limit the impact of short term market volatility, helping you maintain purchasing power and financial stability throughout retirement.

We realise that taking responsibility for your investments can seem like a daunting task. That’s why we have highly experienced investment consultants available to you at any time and completely free of charge. There are no call centres at 10X, just industry experts waiting to help. Get in touch with our investment consultants if you have any questions.

Low-Fee Living Annuity Solutions

As we touched on earlier, fees are an integral consideration if you want to maximise your savings and grow your investment. The impact of high fees may not be felt immediately, but over time (and coupled with inflation), they can begin to diminish returns and ultimately eat away at the value of your hard-earned savings. Essentially, high fees can compound, which negatively affects your living annuity investment.

On the other hand, low fees actively support long-term growth in a few noteworthy ways. Most importantly, lower fees free up more of the returns generated by your investments, which allows for reinvestment and compounding that works for you rather than against you. At 10X, our fees are low and entirely transparent. By bringing down costs, we can facilitate real returns that not only keep up with inflation but exceed it, thus enhancing the sustainability of our client’s retirement income.

Distinguishing Between Fund Performance And Net Investment Returns

Fund performance refers to the returns generated by the fund in which you have invested. As you can imagine, this will vary in depending on who you have invested with, the efficiency of the investment strategy and overarching market trends.

While investment fees do not dictate fund performance, high investment fees will certainly impact your returns and thus, your retirement income. It is only after deducting investment fees (including management fees, administrative fees, and additional charges) that you will be able to deduce your net investment return.

To give you a better idea of what we mean: if you were to invest R100,000 in a living annuity that boasts an 8% annual return rate, you might expect to receive R8,000 a year income. But, you still need to subtract fees and account for inflation. If you’re paying 3% in fees and inflation sits at 4%, you can only draw down 1% (or R1000) to keep the golden equation balanced.

This should demonstrate the importance of keeping fees low, as they can have an outside impact on the real value of your returns in the long run because they compound year after year. If you want to safeguard your purchasing power and preserve the value of your savings, choosing the right provider is perhaps the most critical decision you can make. And it’s about more than just fees. Ask yourself – does your provider provide the kind of service that reflects the magnitude of your commitment to them? If you think your investments could be doing better for you, or you’re frustrated by bad service in one of the most important facets of your life, talk to us.

Adjusting Living Annuity Drawdown Rates

Drawdown rate refers to the percentage of your living annuity’s overall value that you decide to withdraw monthly as income. In South Africa, the legislated drawdown range falls between 2.5% and 17.5%, and you are free to adjust your drawdown within these limitations to suit your needs. That being said, the benefit of a smaller drawdown rate is that it sustains savings more effectively.

Typically, withdrawals in the 4-5% range are common – choosing anything above 6% could have negative implications on your capital in the long run. As mentioned, the ability to adjust their drawdown rate is one of the main reasons why people opt for living annuities over other retirement savings investment products such as a life annuity. Even if the life (guaranteed) annuity has been designed to increase in line with inflation, rising prices in other areas can still outpace these incremental adjustments – and this often results in the reduction of purchasing power and leaves retirees worried about funding the remainder of their retirement.

For this reason, living annuities are considered to offer greater flexibility when it comes to investment decisions and income options. Ultimately, the versatility provided by living annuities serves as an effective way to ‘inflation-proof’ your retirement prospects. By sticking to sustainable drawdowns and referring to the Golden Equation, you can forge a path towards preserving your capital and securing a seamless, financially stable retirement journey.

Asset Allocation To Inflation-Proof Your Living Annuity

10X relies on a diversified asset allocation strategy that spreads investments across a range of asset types like equities, property, bonds, both local and. With a 10X living annuity, you can select the fund that makes the most sense for your investment goals and lifestyle. Investors with a higher risk tolerance and more room for growth might lean more heavily into equities, which have a history of outpacing inflationbut carry more short term volatility risk. Those who prefer less risk might prioritise cash and bonds, which offer more portfolio stability.

Diversifying across asset classes and geographic regions not only enhances potential returns by tapping into different sectors of the economy (and different economies themselves), but also protects against country-specific risks, like a possible weakening of the Rand. 10X offers up to 100% offshore exposure for clients who would prefer it, although our data suggests that 40-60 percent is a healthy number, depending on how your total assets and liabilities stack up.

While market downturns might be scary if you’re not employed any more, retirees need to guard against becoming too conservative too quickly. These days, one might be retired for more than 20 years, and so investing for the long term with a healthy mix of growth-focsued and defensive assets could help maintain purchasing power and potentially generate investment growth throughout your retirement. With 10X, you have a wealth of underlying funds at your fingertips, each structured to align with varying levels of risk tolerance, time horizons and personal financial goals.

Take Control Of Your Retirement Savings With 10X Investments

As a retiree, taking proactive steps to protect your retirement income means choosing a provider with low fees, effectively managing sustainable drawdown rates and making sure your portfolio is adequately diversified.

At 10X Investments, we have all the tools you need to live the retirement you deserve. Our substantial expertise and track record, low and transparent fees, and highly performant funds make preparing for retirement (and ensuring sustainability throughout) easier than ever before.