What living annuity drawdown rate can I take without running out of money?

A living annuity drawdown rate determines how much income you take now and how much capital remains invested for later. The permitted range is wide, but the sustainable range for one household may be much narrower.

The living annuity drawdown answer | The answer

No single safe living annuity drawdown rate exists. The correct rate depends on age, investment returns, inflation, fees, tax, other income, expected longevity and future capital expenses. The legal range defines what you may select; a cash-flow model tests what the portfolio may be able to sustain.

How living annuity drawdown rates work | How it works

You must choose an annual income between 2.5% and 17.5% of your living annuity value. This can usually be reviewed once a year. In South Africa, drawdown income from a living annuity is taxed as normal income according to the personal income tax tables. This means your living annuity income is added to any other income you have, such as rent, consulting, interest or pensions, and the total is taxed at your marginal rate. Careful coordination of all your income streams is important, as a higher total can move you into a higher tax bracket or affect your eligibility for rebates and credits.

The main risk is outliving your capital. High inflation, fees or poor returns early in retirement make high drawdowns more dangerous. Irregular costs like vehicles, home repairs, medical bills or family support need their own budget. Do not assume every need can be met from monthly income.

Balancing income now against capital later | Income vs capital

Owners often weigh up a larger lump sum with a lower drawdown against a smaller lump sum with a higher drawdown. The right answer depends on other assets, debt, health, spending flexibility and the need for accessible capital. Neither is always better. Tax and cash-flow effects should be modelled together.

A practical living annuity example | An example

A retiree selected a drawdown rate that looked conservative when considered on its own. However, after preparing a five-year capital budget for a vehicle, home maintenance and medical costs, the sustainable monthly income turned out to be lower than expected. Here is how the adjustment process worked:

1. The retiree started with a 7%* drawdown rate.
2. A financial adviser helped map out major expenses for the next five years, such as a new car, a roof replacement, and expected medical co-payments.
3. After including these capital needs in a cash-flow projection, it became clear that the original drawdown rate was too high for long-term sustainability.
4. The drawdown rate was reduced to 5.5%*, which allowed for both essential monthly spending and the planned larger expenses, with a better likelihood of lasting throughout retirement.

By adjusting the drawdown early on and testing the plan with realistic numbers, the retiree avoided overspending and reduced the risk of running out of money. Professional guidance made the trade-offs easier to see and provided peace of mind.

Review the drawdown rate every year | Review yearly

Review your drawdown rate every year. Check it against investment returns, inflation and actual spending. A rate that worked before weak returns may become risky. Ask whether spending can adjust, whether the portfolio is still right, and whether other income can take more strain.

Official references

• ASISA: living annuity drawdown rules and statistics
• SARS: tax and retirement