How much income can you safely draw?

2015-10-07 06:00
Paul Leonard CFP® of Money Talk.


Paul Leonard CFP® of Money Talk. Photo: Supplied

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MOST retiring South Africans invest their retirement money into living annuities to pay them a pension. However most draw too much and are at risk of depleting their capital. How much can you draw and still be safe?

Explaining the table

Follow the numbers in the table below. If you (1) invest R1 million, (2) get a return of 10% pa, (3) draw in income of R4,167/m (5%) in the first year increasing with inflation, then (4) the money could last for about 26 years. After that the R1 million will be gone.

Why does the money run out?

If the growth on the investment is 8% and in year one the withdrawals are only 5% it means that 3% is reinvested. Why does the table say the money will run out if you are not even drawing all of the “interest” out?

The reason is Inflation. The R4,167/m increases with inflation each year (6%). As the withdrawals increase they eventually catch up to the growth and start dipping into capital. At first it’s only a small amount of capital but each annual increase digs deeper into the capital and therefore the money runs out after 26 years.

Withdrawing too much and investing too conservatively

Most retirees, however, draw at around the 8% per annum (R6,667/m) level which means that that same R1million would run out in about 14 years. If you retire at 60 your money would be finished before you turn 75.

People are living longer and retirement could easily be a 20 to 30 year phase of life, so depleting capital in 14 years could be disastrous. If you want a higher income and also want the money to last longer, you have to invest more aggressively. Increasing the income to, say, 7% (R5,833/m) and simul-taneously increasing the return to 12% pa would give your money a potential 33 year lifespan.

A 12%pa portfolio is more volatile, but you are giving yourself the possibility of sustaining a better lifestyle for longer.

Investing conservatively does not give you that possibility.

Living annuity limits

The maximum income that you can draw from a living annuity is capped at 17,5% per year which means that the money will actually last longer. However, if you hit the maximum withdrawal cap your lifestyle will be eroded because your withdrawals will no longer be able to keep pace with inflation.

Skilful management is required

Withdrawals levels should be carefully considered in year one and well managed in subsequent years. If done skilfully, your living annuity will serve you and next generation well. Get help from a professional Financial Planner.

Free consultation

If you are retiring or already retired and want assistance with your financial plan and investments (like living annuities) contact Consolidated Financial Planning at 041 373 7999 to set up a free introductory meeting. Alternatively send an email to

Consolidated Financial Planning (Pty) Ltd is an authorised financial services provider - FSP License Number 12978. –

Paul Leonard CFP®,

Executive Director of Consolidated Financial Planning

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