Be a savvy retiree, and get more money from your living annuity

Saving for retirement can seem like struggling into an ill-fitting suit: you’ve got the asset-spreading requirements of Regulation 28, offshore investment limits, exchange controls... And let’s be honest: nobody likes being told what to do – especially with their own money. It shouldn’t come as a surprise then, that many retirees choose a living annuity. Compared to a guaranteed (or ‘life’) annuity, a living annuity at least gives you a say over your annual income, and how your money is invested. 

Your living annuity could be doing better for you. Use the 10X Effective Annual Cost Calculator to see if you could be getting more money out. 

Living annuities are not subject to Regulation 28 (unless part of a retirement fund’s official annuity strategy), which means there are no asset-spreading requirements and no limits on how much may be invested offshore (subject to what the asset manager allows). Another great feature that many retirees don’t know about, is that you can transfer your living annuity from one provider to another and potentially save on fees, therefore extracting a lot more income from your savings. Section 37 of the Long-Term Insurance Act allows such transfers, provided the two insurers follow the steps set out in FSCA Directive 135. We’ll talk more about this further down. 

Getting the most out of your living annuity

Retirement usually means saying goodbye to a regular paycheque and starting to live off your savings. Many retirees, even the well-off, struggle with this adjustment. But there are ways to get more income from those savings. Here’s what to think about to make sure you’ve got your income bases covered. 

Did you know you can get a free comparison report from 10X, so you can see if your investments could be doing more for you? 

Understanding the 4% rule

Take 4% of your retirement savings in your first year, adjust that amount for inflation each year after that, and you're looking at money that should last 30 years or more. This isn't just a number pulled from thin air - it comes from research done by financial adviser William Bengen in 1994. He analysed decades of market data to find a withdrawal rate that could survive even the worst market conditions. 

Let's make this real with an example: 

Say you've built up R9 million in retirement savings. Following the 4% rule, you could withdraw R360,000 in your first year (that's R30,000 monthly). Each year after that, you'd increase this amount to keep pace with inflation. 

There is one important caveat: this rule assumes your savings stay invested in a diversified portfolio of growth assets like equities, bonds, and property throughout retirement, not just sitting in cash. Why? Because a diversified portfolio of growth assets has historically beaten inflation, which is vital for maintaining your buying power over a long retirement. 

But why 4%?

The magic of the 4% rule isn't the number itself - it's what that number represents. It's a withdrawal rate that's weathered all sorts of market conditions: 

• Market crashes 
• Periods of high inflation 
• Long bear markets 
• Different economic cycles 

And that's something that catches many retirees off guard: your investment returns likely won't come in a neat, straight line. They'll bounce up and down from year to year. The 4% rule is built to handle these bumps, even if you hit poor market returns right after you retire (what experts call sequence of returns risk). 

Did you know you can use the 10X Living Annuity Calculator to do your retirement income sums? 

Understanding the negative impact of high fees

Your capital is not depleted just by what you draw as income, but also by what your financial service providers draw as their income, by way of fees. You need to factor fees into the equation you have to balance (shown below) to ensure the sustainability of your retirement funds: 

Drawdowns + Fees + Inflation < Investment Returns 

You may be drawing down conservatively at 4% per annum, but if you are also paying 3% pa in fees, you are effectively drawing down at 7%. Then add inflation (for example 6%) and suddenly your investments need to return 13% just for you to break even.   

Assume you draw down at 4% from a R6m pension pot, meaning you will receive a pre-tax income of R240,000, or R20,000pm. If you’re paying 3% per annum in fees that’s around R180,000 (R15,000 per month). Moving to a low-cost provider that charges less than 1% per annum in fees, you’re now paying less than R5000 per month in fees, leaving that extra 2% (or around R10,000) to be reinvested, as a buffer against inflation, or available to you as income in you really need it. Depending on your choice of portfolio and future market returns, that 2% compounding in your living annuity could add significant years to your savings (this example assumes the same rate of return across both providers). 

Moving your living annuity could mean more money

While there is little you can do to increase your retirement pot once you have stopped working, there are ways to get more out of your savings, by investing for growth, sticking to an appropriate draw-down rate and keeping your fees low. 

“In our experience, many living annuity holders don’t appreciate the impact of fees on the longevity of their savings,” says 10X Investment Consultant Lead Andre Tuck. “Or they don’t know they can move to a low-cost provider and give themselves an immediate income hike, or more peace of mind. Others hesitate, because the process is made to appear cumbersome, and they fear it may interfere with their income payments.” 

Did you know you can speak to Andre directly about your retirement savings? There are no call centres at 10X, just experienced humans that will give you the facts. Get in touch!