Retirement can be a daunting prospect. Not only is it a time of personal adjustment but it is also a time to make financial decisions that will impact your lifestyle for the rest of your life. Retired investors commonly face the dilemma of either maintaining a certain lifestyle or adjusting it in order to preserve their savings. Typically the more income one draws and spends today, the less is available to create future income. When inflation is added to this quandary, it becomes important to also grow that income over time to retain one’s buying power. Marriott has researched the sustainable levels of income that retirees were able to draw historically, to better understand the difficulties retirees face and why in retirement you should spend the income and not the capital.
Historic analysis of living annuities in South Africa.
Marriott’s research, using returns for South African asset classes going back to 1900, tested how much retirees could safely draw from their savings without running out of capital for 30 years. We assumed each retiree invested R1million in a typical balanced fund (comprising 60% equities, 30% bonds and 10% cash) and drew an annual income that kept up with inflation.
The graph below shows the maximum initial safe withdrawal rates retirees were able to draw and not run out of capital over a 30 year period.
Initial safe withdrawal rates have fluctuated significantly over time. Some retirees were able to start with a withdrawal rate as high as 13%, grow their income in line with inflation and still have a successful retirement (capital lasted for 30 years). A closer look at the data revealed that maximum safe withdrawal rates correlated with the first 10 year annual real returns the investor experienced. In other words lower maximum safe withdrawal rates coincided with lower real returns and visa-versa. This seems obvious but the difficulty retirees face is that future returns are very difficult to predict.
The table below summarises the percentage of retires who failed (failure rates) using different drawdown rates for all 88 retirees with a 30 year investment horizon.
Professor C. Firer’s studies on the history of capital markets
Marriott has two suggestions for retired investors:
1. Match the income drawn with the income produced
Investors should be aware of how much i