A report has found that retirement savings run out after 14 months.
Picture: iStock
It is often said that you need to save before retirement, but what happens once you actually get there? One of the biggest questions retirees face is simple: “How much can I safely spend each year without running out of money?”
Martiens Barnard, marketing actuary at Momentum Investments, unpacks why the familiar “4% to 5% retirement income rule of thumb” still matters and why many South African retirees may be drawing more income than their savings can sustainably support.
A rule of thumb is not a precise formula. Instead, it is a simple, experience-based principle designed to help improve decision-making and outcomes. In financial planning, particularly in retirement, one such principle has shaped decision-making for decades: the retirement income rule of thumb.
Retirement income rule of thumb
The 45th Sanlam Benchmark Survey found that South African pensioners who take a cash lump sum at retirement, on average, deplete the money within a year and two months.
Barnard says the 4% to 5% withdrawal guideline stems from William Bengen’s influential research, which showed that withdrawing approximately 4% in the first year of retirement, adjusted for inflation every year, allowed retirees to sustain income for 25 to 30 years.
However, behaviour in the South African market tells a different story. Most retirees exceed this guideline recommendation, placing unnecessary strain on their retirement savings and jeopardising the long-term sustainability of their income.
Reimagining Retirement
Barnard gives five key risks that determine whether retirement income lasts:
Drawing too much income – Starting retirement with a drawdown rate that is too high is one of the most common mistakes. Higher withdrawals require higher returns to keep income sustainable, increasing reliance on market performance and reducing the margin for error.
Market risk and sequence risk – Markets do not move in straight lines, and retirees remain exposed to short-term losses as well as long-term performance that may turn out to be below average. Sequence risk, the order in which returns occur, intensifies this problem. Poor returns early in retirement, combined with ongoing withdrawals, can permanently erode capital, even if good returns follow later. This makes retirees far more vulnerable than pre-retirement investors, who are still contributing rather than withdrawing.
Inflation risk – Inflation gradually reduces purchasing power, and income that rises more slowly than living costs will fail to meet a retiree’s needs over time. Inflation is one of the most underestimated threats to retirement income.
Behaviour tax – Behaviour tax is the cost of switching between investments, often at emotionally charged moments, such as during market volatility. These decisions typically destroy long-term value, as shown by switching patterns observed across tens of thousands of client transactions.
Longevity risk – Longevity risk is the risk of outliving one’s money. As life expectancy increases, more retirees face the prospect of needing their income to last 30 years or more. Drawing too much, living longer than expected and facing unpredictable markets all multiply this risk.
Getting a sustainable income
Barnard explains the balance required for a sustainable income:
An initial 5% starting drawdown (where the amount withdrawn increases by 5% every year into the future) implicitly assumes a net return of roughly 8.2% a year to maintain living standards.
If a retiree starts at 7%, the required net return jumps to more than 11%.
Missing this 11.2% target by only 2% can shorten income sustainability by as much as a decade.
“All these risks and other aspects of retirement, such as inheritance and the impact that these risks have on leaving one, are unpacked in a series of short, insightful videos that can help clients and financial advisers make better retirement decisions,” he says.
