Living annuity investment strategies: make your money last throughout retirement

Living annuities are retirement savings vehicles that can provide you with a regular income during retirement. You invest a lump sum capital amount in your living annuity, choose the underlying investment portfolios and then draw a regular income from this capital amount. You are, therefore, able to preserve the capital while also allowing for capital growth. Financial security and financial stability are both of utmost importance during the retirement years, and by using strategic and intelligent planning, you can position yourself favourably for retirement. In this article, we will cover the importance of living annuity investment strategies to make your money last throughout retirement.  

Living annuity considerations  

Living annuities allow for your capital to be invested in a variety of portfolios. The returns generated can then be used to fund your retirement income instead of using the initial capital funds invested. Living annuities offer great flexibility, which makes them a popular choice as a source of retirement income. You have flexibility with respect to the underlying investment portfolios that the funds are invested in, as well as flexibility with respect to your annual drawdown rate.   

Depending on your investment needs and the time span for which you require the living annuity to provide you with an income, you choose a suitable portfolio to meet these requirements. This portfolio will be a mix of equities, real estate, bonds and cash. You are able to switch out of funds and adjust your underlying portfolio mix, as required. You are also able to adjust your drawdown rate annually. In South Africa, your drawdown rate can be from a minimum of 2.5% to a maximum of 17.5% per annum, again, depending on your needs.   

Living annuities (as opposed to life or guaranteed annuities) to however carry market volatility and longevity risks. Market volatility refers to high price fluctuations in the market in the short term due to political or other global events and investors’ reactions to these events. This can impact your capital funds and, subsequently, also the income you receive, as your drawdown rate is a percentage of your capital amount. Longevity risk is the risk that your living annuity will not be able to sustain you through your retirement years, the capital will be depleted, and you will outlive your capital. These are both important risks that you need to think about when structuring your living annuity.  

The Golden Equation 

The Golden Equation is a useful framework to use when working out the sustainability of your retirement income. You would want to make sure that your investment returns are either equal to or greater than the sum of your income drawdown, the inflation rate and the  fees you pay: Investment Returns ≥ Inflation Rate + Fees + Income Drawdown.  

• Investment Returns: In order to balance this equation, the first thing to consider is whether your investment returns are as high as they could be. Growth assets such as equities are therefore a must, but what allocation of growth assets is the question. 

• Income Drawdown: You should choose a drawdown rate that ensures your living annuity doesn’t get depleted, and can sustain you through your retirement years. 

• Inflation Rate: Inflation (the increase in the costs of goods and services) is inevitable. It has the effect of reducing the purchasing power of our money. In South Africa, it has historically sat at around 5 or 6%. This means your investment returns will need to be greater than inflation in order for you to break even (and before considering fees and drawdowns).  

• Fees: You want to ensure that the service provider you choose has low fees. Compounded over time, the effect of high fees on your living capital can be substantial. 

By keeping this equation balanced (or in favour of returns), you are helping to preserve and grow your capital through your retirement years. 

Planning your asset allocation  

The correct asset allocation in the underlying portfolios that your capital is invested in is essential in ensuring that your living annuity remains sustainable over the long term, as well as remaining resilient to any market volatility and fluctuations. By including a diversified portfolio - in other words, a mix of different asset classes - we can take advantage of market growth in some asset classes and also mitigate against any losses that may occur in others. 

Certain assets such as equities are more volatile but can yield greater returns, while others, like bonds, are more stable but typically yield lower returns. Cash is stable but usually offers the lowest returns. You would want to select a suitable asset allocation, depending on your risk profile and time horizon. 

 Let’s look at a few examples: 

• If you are a more risk-averse retiree, you might go for a more conservative asset allocation in your living annuity, which would include lower equity exposure. For example, this might be a 30% mix of local and international equities, 45% local bonds, 15% spread across local and international money markets, 6% in international bonds and the rest in property.  
• If you have a moderate risk profile, you might have around 40% in local and international equities, 35% in bonds and the rest spread between money markets and property.  
• If you are risk-tolerant with a longer time horizon, your portfolio might look more like the 10X Your Future Fund, which currently (as of Feb 2025) has almost 60% in local and international equity, roughly 26% in bonds and the rest spread between money markets and property. 

 It’s important to regularly review your asset allocation as your financial needs change over time. 

Assessing risk tolerance 

Your risk tolerance is essentially how open you are to the effects of market volatility, and the associated changes in the value of your investments. If you are risk averse, this means you have a low tolerance for any risk and prefer conservative investment strategies. This will impact the investment decisions you make; you will tend to go for low-risk portfolios, which are more stable and tend to include a lower weighting of growth assets like equities in their asset allocation. 

If you have a medium level of risk tolerance, this means you will target a more balanced strategy. You are happy with some risk and volatility, and therefore would include more growth assets in your asset allocation. If you have a high-risk tolerance, you may include a larger percentage of equities in your portfolio as you target growth.  

It’s important that, as a retiree, you are comfortable with your investment choices and that they match your risk tolerance levels. Your living annuity needs to be able to provide for your retirement years with the goal of both preserving and growing your capital.  

Time horizon  

Time horizon is an important factor to think about when you are planning your living annuity. This refers to the amount of time you would need the investment to provide you with an income. Living annuities are generally viewed as long-term retirement investment vehicles with a life span of 20, 30 or even 40 years. The longer your time horizon, the more aggressive you can be with the portfolios you choose to invest in, as you have more time to ride out any market fluctuations.   

By understanding your risk tolerance and time horizon, you can get a clearer picture of the most beneficial way to structure and amend your portfolio to meet your changing needs over time. If you have queries regarding the structuring and planning of your living annuity, 10x consultants are more than happy to discuss your options with you.  

The Impact of fees on your investments

Fees charged to manage your investment can have a big impact on your living annuity over time. If the fees charged are high, this will be compounded over time and lead to a significant reduction in growth. Conversely, low fees help preserve your capital and allow it to grow. The fees that you can expect to be charged on your investment are management fees, administration fees and advice fees (along with - potentially - some hidden costs!)

Management fees are the fees charged by a fund manager for the managing the fund.

Administration fees are the fees associated with the administration of the investment, such as reporting and tax.

Advice fees are the fees you would expect a financial advisor to charge for the advice and expertise that they provide you on topics related to your finances.   

The Effective Annual Cost is a standardised measure created by ASISA to help you understand the total cost of owning and accessing an investment. The EAC includes the full yearly expenses tied to investment products, including fees for management, administration, advice, early withdrawal penalties, loyalty bonuses and guarantees.   

You should examine your EAC to get a clear picture of the total cost of maintaining your investment. A lower EAC means that a greater portion of your investment is generating returns for you, while higher EACs can reduce net returns as fees accumulate over time. You can use the 10x EAC calculator to determine your total fees.   

To minimise the effects of fees on your living annuity, there are some strategies that you could incorporate:  

• Choose a service provider who is transparent with the fees they charge. This is important to ensure that you aren’t surprised by any unexpected costs or higher-than-expected fees. 
• Select a service provider who charges low fees to maximise the returns you receive and allow your capital to grow. 
• Be aware of any additional fees that may be charged, such as performance fees, exit/withdrawal fees and other penalties.  

A practical example of why fees matter:   

Imagine you invest R100,000 in a fund that delivers an annual return of 12% over 30 years. You must consider how investment fees and inflation can significantly impact your final returns. Let’s compare two scenarios:

Low Fees (1%) vs High Fees (3%).

After adjusting for 6% inflation, here’s what your investment would be worth in today’s money:  

With 1% fees, your real investment value is R398,578.  

With 3% fees, your real investment value is R231,004.  

Even though both investments start at R100,000 and earn the same 12% return, the seemingly small 2% difference in fees leads to a 42% loss in real value over 30 years. This highlights why minimising fees is key for long-term investing, especially when inflation is taken into account.  

10x has no hidden fees. This means no upfront charges, no exit fees, no advice fees, no hidden costs and no penalties for changing your investment strategy.   

Drawdown rates  

Living annuities come with some freedom and flexibility. As an investor, you are able to set your drawdown rate annually. In South Africa, you can select a drawdown rate of between 2.5% and 17.5%. It’s important to periodically review and amend your drawdown rate to meet your changing financial needs.   

Along with this, you will need to ensure that your drawdown rate is sustainable, as your living annuity needs to provide you with an income throughout your retirement years. A drawdown rate of 4% is often thought to be sustainable. Anything higher than 5% risks depleting your capital too quickly. Remember, this comes down to individual circumstances, and your drawdown rate should be dynamic rather than static.  

Other factors to consider when selecting your drawdown rate:  

• Expected life span: If your lifespan is expected to be longer, you will need to select a lower drawdown rate so that your living annuity is able to sustain you for longer through your retirement years. 
• Investment returns: If investment returns are higher, this growth will be able to sustain a higher drawdown rate. If investment returns are low, your drawdown rate will need to be lower in order to avoid depleting your capital too quickly.  
• Inflation: This will reduce the purchasing power of your income over time. 

Applying investment strategies

Let’s compare a few different investment strategy examples used for living annuities and the outcomes that they would potentially produce for investors by then applying the Golden Equation: Investment Returns ≥ Inflation Rate + Fees + Income Drawdown. Let’s assume fees of 1%, inflation of 6% and a drawdown rate of 4%.  

Scenario 1: A conservative investor focusing on capital preservation: 

The conservative investor wants to preserve their capital. They look at an investment strategy of stability with returns of around 5-6%. This scenario would not satisfy the requirements of The Golden Equation, as 6% returns are not greater than the sum of costs (11% across fees, inflation and drawdowns).  

• Scenario 2: A moderate investor seeking balanced growth and income: 

This investor prefers a more balanced portfolio, wishing to preserve their capital and potentially grow it. They aim for an investment strategy more heavily weighted to growth assets and get returns of 7-8%. Again, this scenario would not satisfy the requirements of The Golden Equation as their returns don’t balance out their costs. In this scenario, the investor needs to reduce their drawdown amount, negotiate better fees, or invest in a fund with better returns.  

• Scenario 3: An aggressive investor aiming for higher returns with higher risk tolerance:  

This investor wishes to maximise growth and returns, so they invest rpimarily in growth assets and get returns of around 10-12%. This scenario has the best chance of being in line with The Golden Equation, as 12% is greater than the some of their costs. 

However, these examples are simplified: each investor’s situation and financial needs differ from the next, and many have alternate sources of income that enable them to have a more conservative investment approach, and not rely on growth at all costs. 

At 10x, you retire your way with superior returns, low fees, exceptional service and up to 100% offshore exposure for living annuities. Speak to a 10x consultant today to learn more.