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Post-retirement annuity income:

An evaluation of income withdrawal strategies


Every year living annuity (ILLA) investors review their annuity income and make an annuity income choice for the forthcoming year. The chosen income will be a fixed rand amount or percentage of retirement capital available at that stage for the forthcoming year. Typically, investors receive from the ILLA product provider a review document that contains income withdrawal (drawdown) guidelines from ASISA (The Association for Savings and Investment South Africa).


For example, the following guidelines are included in the annual review document. Current legislation permits a minimum drawdown rate of 2.5% and a maximum drawdown rate of 17.5% of retirement capital each year.


It is easy to base one’s income withdrawal (drawdown) decision purely in percentage terms, especially to align one’s decision with ASISA’s guidelines, but an unfortunate consequence thereof is that there are no guarantees that every year the growth of the investment portfolio will outperform or grow in line with inflation, i.e. rising living costs. Or, it may very well be that portfolio growth is well above the inflation rate that would result in the investor drawing down perhaps too much income that may adversely affect the long-term sustainability of the retirement plan going forward.  Alas, good times (high-return periods) do not last forever.


The table below illustrates the typical dilemma an investor may face when she is basing her income decisions purely on percentage of retirement capital, namely that the rise (or decline) of annuity income is not directly related with the inflation rate over time.


Alternatively, the ILLA investor may choose a fixed amount that she increases each year with the prevailing inflation rate. In that respect, the annuity income stream is much more predictable (see table below), but the underlying retirement capital may be eroded too soon, especially when investors are experiencing a spate of bad return periods.


Thus, it seems there is no ideal strategy to overcome fluctuating income that does not keep up with inflation every year (fixed percentage), or the risk of depleting the living annuity investment perhaps too soon (fixed inflation-adjusted amount). Yet, perhaps there is a better way – not necessarily foolproof in all situations, but at least with much better chances of success than any one of the two drawdown strategies in isolation.


This research paper focuses on the likelihood of sustaining one’s retirement plan by using the two drawdown strategies, namely fixed percentage and fixed amount (with inflation escalation), and introducing a third strategy, that is effectively a hybrid of the two aforementioned strategies. This hybrid strategy, termed a dynamic drawdown strategy, uses a fixed amount that escalates each year with inflation, but upper boundaries (“ceilings”) to the annual withdrawal amount apply. Thereby the potential withdrawal amount in certain situations is limited and thereby enhancing the sustainability of the retirement plan. The net result is a post-retirement income plan with higher probabilities of succeeding in yielding inflation-adjusted income without unduly sacrificing the underlying retirement capital over the long term.



Contents of publication:

Introduction – context

Methodology and simulation model framework

Results of simulation analyses

Dynamic drawdown strategy and evaluation

Comparison of drawdown strategies


The full report will be e-mailed upon request.



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