Consider a simple question: how many cups of coffee did you drink yesterday? For most people, the answer falls somewhere between two and four. Interestingly, recent health studies even suggest that up to six cups per day may be beneficial, provided the coffee is taken black, without additives, and not within the first 90 minutes of waking.
We rely on similar guiding principles in other parts of life. When driving, we are advised to maintain a three-second following distance. And although many people claim they ‘get by’ on six to seven hours of sleep, the recommended guideline remains seven to nine hours per night.
These examples highlight the power of a rule of thumb. A rule of thumb is not a precise formula. Instead, it is a simple, experience-based principle designed to help improve decision-making and outcomes. In financial planning, particularly in retirement, one such principle has shaped decision making for decades: the retirement income rule of thumb.
The well-known 4 to 5% withdrawal guideline stems from William Bengen’s influential research, which showed that withdrawing approximately 4% in the first year of retirement, adjusted for inflation every year, allowed retirees to sustain income for 25 to 30 years. However, behaviour in the South African market tells a different story. Most retirees exceed this guideline recommendation, placing unnecessary strain on their retirement savings and jeopardising the long-term sustainability of their income.
Living annuity statistics published by ASISA illustrate this clearly. While the average drawdown rate dropped to 5.6% in 2024, it sat at 6.6%, 6.7% and 6.9% over the previous three years. Even though these figures reflect average current (not initial) drawdowns, they highlight that a large proportion of retirees withdraw at levels that are simply too high. This forms the first of five key risks unpacked in our ‘Reimagining Retirement’ campaign.
The campaign explores the five crucial risks that determine whether retirement income lasts:
- Drawing too much income
Starting retirement with a drawdown rate that is too high is one of the most common mistakes. Higher withdrawals require higher returns to keep income sustainable, increasing reliance on market performance and reducing the margin for error. - Market risk and sequence risk
Market risk refers to the uncertainty of investment returns. Markets do not move in straight lines, and retirees remain exposed to short-term losses as well as long-term performance that may turn out to be below average. Sequence risk, the order in which returns occur, intensifies this problem. Poor returns early in retirement, combined with ongoing withdrawals, can permanently erode capital, even if good returns follow later. This makes retirees far more vulnerable than pre-retirement investors, who are still contributing rather than withdrawing. - Inflation risk
Inflation gradually reduces purchasing power, and income that rises more slowly than living costs will fail to meet a retiree’s needs over time. Inflation is one of the most underestimated threats to retirement income. - Behaviour tax
Behaviour tax is the cost of switching between investments, often at emotionally charged moments like during market volatility. These decisions typically destroy long-term value, as shown by switching patterns observed across tens of thousands of client transactions. - Longevity risk
Longevity risk is the risk of outliving one’s money. As life expectancy increases, more retirees face the prospect of needing their income to last thirty years or more. Drawing too much, living longer than expected, and facing unpredictable markets all multiply this risk.
We explain the delicate balance required for a sustainable income. For example:
- An initial 5% starting drawdown (where the amount withdrawn increases by 5% every year into the future) implicitly assumes a net return of roughly 8.2% a year to maintain living standards.
- If a retiree starts at 7%, the required net return jumps to more than 11%.
- Missing this 11.2% target by only 2% can shorten income sustainability by as much as a decade.
All these risks and other aspects of retirement, such as inheritance and the impact that these risks have on leaving one, are unpacked in a series of short, insightful videos that can help clients and financial advisers make better retirement decisions.
Despite these challenges, we show that retirees can meaningfully improve retirement outcomes by adopting a more modern approach to structuring their income. One of the most effective tools is a hybrid annuity, which combines a market-linked investment portfolio with a guaranteed income component.
We have reimagined retirement income planning by enhancing the Retirement Income Option, the living annuity on the Momentum Wealth platform. You can add the Guaranteed Annuity Portfolio if you want to blend certainty and flexibility in one retirement income solution.
This structure introduces stability, reduces reliance on volatile markets, and helps protect against several of the five key risks, without completely sacrificing flexibility, which many retirees value.
For more on the Reimagining Retirement campaign, click here.
Momentum Wealth is part of Momentum Investments and Momentum Group Limited. Momentum Wealth (Pty) Ltd is an authorised financial services provider (registration number 1995/008800/07, FSP number 657). Momentum Metropolitan Life Limited is an authorised financial services and credit provider (registration number 1904/002186/06, FSP number 6406). Momentum Wealth International Limited and Momentum Metropolitan Life Limited Guernsey Branch are part of Momentum Group Limited (registration number 2000/031756/06) (South Africa).
