2025’s lessons in retirement income planning

Many retirement fund members face the challenge of managing a sum of money from a retirement fund to provide an income for as long as they live, without knowing for how long they will live.

Increasingly retirees are living longer as a result of medical advances. Across the world, retirees are outliving their retirement savings by more than a decade, according to the World Economic Forum.

Discovery’s data shows that more than 60 percent of retirees should plan to live beyond the average life expectancy. Recent developments in the treatment of cancer, which causes many deaths at higher ages, will have a significant impact on longevity, Kenny Rabson, chief executive officer of Discovery Invest, said when the company launched its latest annuity product with longevity protection earlier this year.

More years in ill-health

In addition, the company says, longer lives often mean more years in ill-health and sick retirees spend three times more on out-of-pocket expenses than healthy retirees while 70 percent of retirees aged 65 will require expensive long-term care.

Despite these scary statistics most South African retirees choose investment linked living annuities, which have no protection against longevity, to provide a monthly pension.  

If you start drawing too high an income from investments in a living annuity and increase each year for inflation, you can quickly run the balance down and reach the maximum drawdown allowed - 17.5 percent of the capital.

This point is referred to as the point of ruin because your income can then no longer be adjusted for inflation and decreases in real (after-inflation) terms each year thereafter. 

This year there were more insights into how to manage the risks of outliving your retirement investments and avoiding the point of ruin:

The power of blending annuities

Using a blend of a guaranteed life annuity with a living annuity can lower your risk of outliving your capital and increase your chances of drawing the income you need. The research backing this was provided by actuaries John Anderson and Stephen Empedocles in a 2016 research paper, The retirement income frontier and its application in constructing investment strategies at retirement.

Many retirees resist buying a guaranteed annuity, however, because they expect it will reduce the legacy they can leave their heirs when they die. However, the paper by Anderson and Empedocles found that blending annuities not only maximised your income but also your chances of leaving a legacy.

At this year’s Actuarial Society of South Africa conference, Martiens Barnard, an actuary with Momentum Investments, presented a paper showing that blended annuities reduce the return required to sustain retirees’ income from a living annuity and may have a positive impact on poor investment decisions.

Barnard’s paper states that generally a living annuity can sustain an income that keeps up with inflation for 25 to 30 years as long as the retiree starts with an income equal to just four or five percent of their capital and earns a net-of-fees return of just more than 8 to 10 percent a year.

But most retirees with living annuities on the Momentum investment platform start with higher income drawdowns that can only be sustained with a higher after-fee return.

The average living annuity drawdown in 2024 was 5.6 percent of capital, the Association of Savings and Investments South Africa reported this year.

This was, however, the lowest average drawdown rate ASISA has ever recorded and followed a period of good returns. Average drawdowns were above six percent between 2020 and 2023.

HOW BLENDING ANNUITIES REDUCES RETURN REQUIRED
	Initial drawdown increasing with inflation each year	Return required before fees to support required income to age 90
Living annuity	5%	8.2% (possibly 10% with fees)	A hybrid annuity has a lower inheritance value in the initial years of retirement compared to a living annuity, but there is high probability that a hybrid annuity can have a larger inheritance value in the later years. The initial drop in inheritance value can be offset by incorporating a guarantee term on the guaranteed annuity.
Living annuity	7%	11.2% (possibly 13% with fees)
50% living annuity, 50% guaranteed annuity	7%	8.2% (possibly 10% with fees)
Source: Exploring hybrid annuities, behaviour tax and whether the choice of annuity affects this tax presented by Martiens Barnard to the ASSA Convention 2025. www.smartaboutmoney.co.za

A retiree who starts retirement drawing down seven percent of capital needs an after-fee return of 11 to 13 percent a year, Barnard’s paper shows.

But if 50 percent of your capital is used to buy a guaranteed annuity the return required to keep the income increasing with inflation until age 90 reduces to eight percent, Barnard’s research found.    

Guaranteeing some of your income means you can take more risk with the remaining capital in the living annuity, Barnard’s paper states.

Early indications are that it may also reduce the number of investors making ill-time investment switches to chase better-performing funds. Momentum’s research shows that living annuity investors lost on average 4.6 percentage points of returns to this behaviour. Cumulatively, investors using Momentum’s investment platform lost R60 million to ill-timed switches in 2024, Barnard’s paper notes.

How much to blend

Another challenge retirees face is working out how much of each kind of annuity to use.

Annuity provider JustSA produced a paper containing an easy-to-use matrix to help financial advisers determine the right blend (see table below).

BLENDING LIVING AND LIFE ANNUITIES
Drawdown required	Age			% guaranteed
	55-69	70-79	80+
Level 1	4.5-5.4%	5-6.4%	6-8.9%	25%
Level 2	5.5-6.4%	6.5-7.9%	9-11.9%	50%
Level 3	6.5-7.4%	8-9.4%	12-14.9%	75%
To apply this stable, follow these steps: 1. Choose your age 2. Choose the drawdown rate you require in the applicable row the column for your age group  3. The column on the right shows the percentage you should allocate to a guaranteed annuity. Source: JustSA A Guide to blending retirement income www.smartaboutmoney.co.za

JustSA provides an underlying portfolio that can be included in a living annuity producing a with-profit guaranteed annuity income. This is now available on a number of investment platforms.

JustSA’s paper says many retirees try to avoid the immediate “loss” that comes with buying a guaranteed annuity without appreciating the long -term cost of not using this product. They delay buying a guaranteed annuity which typically reduces their future income and increases overall costs, it says.

Deferring guaranteed income

While many actuaries agree that blending guaranteed and living annuities is the most effective retirement income solution, Discovery Invest launched a new product this year that it says provides a more efficient way of protecting retirees from longevity.

Rabson says most retirees do not initially need the guaranteed income and want to keep the bulk of their money invested in a living annuity to allow it to grow.

In its Lifespan Income Plan, Discovery Invest has therefore combined a living annuity with a specially designed guaranteed annuity that mimics what is known as deferred annuities in other parts of the world.

A deferred annuity is purchased at retirement, but the income is only paid to you later in retirement. Buying the guaranteed life annuity at retirement rather than at a later age ensures better rates. South African legislation does not provide for deferred annuities.  

The Lifespan Income Plan uses between five and seven percent of the capital to purchase the guaranteed income so the bulk of your savings is invested in the living annuity.

The guaranteed annuity is set up to make only a small monthly payment for the first 15 years of retirement. 

When the average retiree is 80 (15 years from retirement age 65), there is a big increase in the guaranteed annuity income. This allows retirees to reduce the amount withdrawn from the living annuity and reduces the risk of reaching the point of ruin. Alternatively, the higher income can offset the cost of long-term care required at higher ages.  

The income that the guaranteed annuity provides at age 80 is based on the amount used to purchase it and the annuity rates when you retire, Craig Sher, chief product and investment officer at Discovery Invest explains. The income does not increase annually for inflation.

For example, if you invest R1 million and use R57 000 (5.7 percent) to buy a guaranteed annuity when rates are between five and six percent, it could buy an income of a few rand initially that increases to R57 000 a year (R4 750 a month) at age 80, he says.

A small life policy ensures that if you die before age 80, the full amount used to purchase the guaranteed annuity is returned to you (without any growth), Sher says.

The Lifespan Income Plan also offers retirees who manage their money and health well using Discovery’s Vitality programmes income boosts of up to 50 percent.