This is a difficult question to answer, and one which many retirees are forced to grapple with.
In terms of current SARS practice, you are allowed to withdraw no less than 2.5% and no more than 17.5% of the capital amount of the living annuity fund per annum (for more information on annuities read our article “Life and Living Annuities (Q&A)”).
Let’s break this down…
For the purposes of this exercise, it is assumed that the growth in the nominal value, i.e. the actual percentage growth earned on the investment of ‘the capital’ in the living annuity fund, will increase in value by 10% per annum. Note, however, that this rate of growth is an assumption which may or may not be achieved.
It is apparent from the above (not taking inflation into account) that an investor could draw 10% per annum and not deplete the capital. Yet this does not take into account inflation which is currently running at 5.9% (but let’s say 6% for the purposes of this note).
Taking inflation into account, the investor should not draw more than 4% income per annum in order to retain the purchasing power of the capital. If the investor draws more than 4% per annum, then it is clear that he or she is depleting the purchasing power of the capital.
If 5% income per annum is drawn, then apart from depleting the purchasing power of the capital, calculations by Coronation Fund Managers show that the investor would reach the 17.5% – which is the maximum permissible per annum withdrawal from the fund in 34 years.
If 7.5% is withdrawn per annum then again, Coronation Fund Managers’ research shows the 17.5% per annum limit would be reached in 12 years.
What does this mean to you?
The above note shows that by reducing the initial amount you take from a living annuity by 2.5% per annum, you can retain the purchasing power of your annuity for a significantly longer period of time. In addition, if you are able to supplement your life annuity income by a relatively small amount, it can make a big difference. (I refer you to the article “Rethinking Retirement”).
Another interesting point to note is that if you delay retirement by three years, you can increase the sustainable drawdown rate (income taken) by around 20% – and this is without making further contributions. Definitely something to think about!