Financial Planning

Retirement: What if the RECOMMENDED withdrawal rate is not enough?

Last week I discussed the impact of withdrawal rates on a living annuity’s lifespan and I showed investors how a withdrawal rate of 7.5% and higher can knock both time and value off your income and overall capital over the longer term. However, the withdrawal rate of between 5% and 6% recommended by the Association for Savings and Investment South Africa (ASISA) makes countless investors’ blood run cold, because for so many on the brink of retirement, it simply won’t be ‘enough’ to live off.

What should I do if I’m close to retirement and realise that the RECOMMENDED withdrawal rate won’t be enough?

To answer this question properly, you must also determine the following:

  • Is there any possibility that you can postpone your retirement?

I have mentioned before that it has been scientifically proven that people live longer these days, therefore your capital should be able to provide you with an income for longer. If you were not declared medically unfit, or your retirement is not compulsory, I would suggest that you keep working for as long as possible. The sobering reality is that if you cannot survive on a withdrawal rate of between 5% and 6%, you’re just not ready for retirement.

The longer you can work and earn an income, the longer before you have to dig into your retirement savings. More importantly, it gives your capital the opportunity to grow even further through additional contributions. Also, many people who willingly decide to work for longer report feeling positive about the fact that they still have the opportunity to stay active.

My retirement is compulsory or I have been declared medically unfit – what should I do if the RECOMMENDED withdrawal rate isn’t enough?

Without wanting to sound too harsh: you need to make it work. Cut back where you can. If you don’t have an additional source of income, or you won’t be able to get one, things aren’t looking too good for you. Very few people out there truly understand the dire impact a high withdrawal rate can have on their lives in the long run. Just ask yourself whether the current old age pension grant (2019: maximum of R1 780pm for individuals older than 60 years and R1 800 for individuals older than 745 years) will be enough to live off. Will you be able to maintain your house, pay for utilities, food, clothing and medication from the above-mentioned grant when your living annuity has been depleted? I doubt whether many of you will truthfully be able to answer “yes” to that question.

Never underestimate the power of a well-planned budget, even if it means that you need to make sacrifices, whether you make them prior to retirement, or during. Here are my tips for compiling a quick fifteen-point budget:

  1. Preferably start with a blank Excel spreadsheet, or a sheet of paper with columns.
  2. Categorise your expenses by carefully working through the past week’s bank transactions or bills.
  3. Do not forget to include your hobbies and other expenses; they also have to be categorised.
  4. Any form of income that flows into your account must be indicated clearly to determine your total average monthly income.
  5. Remember that saving comes first and not after your expenses have been covered, so be sure to set a fixed amount aside monthly. Also ensure that you have a separate savings facility at your disposal.
  6. Keep a realistic target amount in mind by which you would like to cut your expenses for each expense category, to try to save more.
  7. Once satisfied that all possible categories have been covered, start capturing the data on your piece of paper or spreadsheet.
  8. Take note of cash withdrawals and be sure to indicate them clearly every week.
  9. Calculate the subtotals of your main income and expense categories.
  10. Subtract your total expenses from your total income to calculate your net income.
  11. If you have a negative net income (i.e. your expenses exceed your income), you will have to seriously re-evaluate your spending habits.
  12. If you have a positive net income, transfer the bulk of this amount to your savings account, unit trust or any other savings facility identified in step 5. Leaving the money in your bank account will lead to the temptation of unnecessary spending.
  13. After a month or two, you should be able to identify and quantify your expenses, which means it’s time to have another look at possible ways in which you can cut back.
  14. Set realistic goals to cut back on expenses by starting with the biggest expense first, then work your way down.
  15. Keep your budget up to date and be sure to evaluate your budget monthly going forward.

Retirement isn’t the end. For many retirees, compulsory retirement feels like a death sentence, but it really doesn’t have to. In many cases, there is no reason why you cannot continue to work on a casual or even permanent basis elsewhere to earn an extra income. Every cent you can earn to help you avoid digging into your retirement fund will help to stretch it further. Remember that we don’t have sell-by dates like food on shelves, meaning that we don’t know exactly how long our funds will have to last us. Although we plan to outlive most things in life, a pension fund must be the one thing that can win the race against time.

The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken based on the information contained in this newsletter. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.


Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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