Avoiding sequence-of-returns risk in a living annuity

Building blocks to a lasting Living Annuity

Our panel of experts discusses living annuities, sustainable drawdown rates, offshore investing, and everything else one might need to consider to ensure a comfortable retirement. Read more

For most retirees with a living annuity, the primary concern is how well the annuity is performing. But there’s also another concern that is often overlooked, the order in which good and poor returns occur. This is called the sequence-of-returns risk. In other words, the timing of strong or weak market performance can significantly influence the long-term outcome of your retirement savings.

This is further exacerbated when you are drawing an income. Strong returns when you initially retire can set you up for long-term success. Unfortunately, poor returns at the point of retirement, coupled with income withdrawals, may have a big impact on your living annuity capital.

In this article, we will delve deeper into this risk, explain why asset allocation and fees are good levers to pull in making the best out of the market conditions available, and also provide a framework that might help retirees conceptualise their living annuity investments better.

Quick recap: How a living annuity works

A living annuity is a post-retirement investment vehicle that provides you with an income while also keeping your savings invested to potentially grow over time. You are able to select a drawdown rate annually of between 2.5% and 17.5%. This can be paid out annually, biannually, quarterly or monthly, depending on your preferences.

You will need to carefully manage areas such as your drawdown rate, fees and asset allocation, as these will all play a role in the sustainability and longevity of your living annuity. The responsibility lies with you as the investor to ensure that your living annuity is managed efficiently and effectively as much as possible, and is able to provide for your retirement years.

Unlike guaranteed or life annuities, a living annuity shifts the investment and longevity risk to you, which makes ongoing decision-making especially important. As such, you need to regularly review your portfolio, adapt your drawdown rate as circumstances change, and ensure that your investment strategy remains suitable for your time horizon.

Money mistakes to avoid during retirement

Retirement should be a time for relaxation. These tips will help you reduce the stress of your golden years, and retire better! Read more

Market conditions, inflation and the level of income that you choose to withdraw will all impact how long your savings last. With discipline and informed adjustments, you can greatly increase the chances of keeping your retirement income stable and sustainable.

What is sequence-of-returns risk?

Sequence-of-returns refers to the danger of experiencing poor investment returns in the early years of retirement. The order in which good or bad returns occur, particularly at the point where you begin withdrawing an income in retirement, can have a significant effect on the long-term value of your annuity.

If you are drawing an income during a market downturn, this means you are potentially locking in these losses, which makes it hard for your capital to recover later.

You can have two investors who start with the same initial investment, receive the same average returns and have the same drawdown rate, but the investor who experiences poor returns at the start of their retirement will end up in a worse financial position as the capital base shrinks when it is most vulnerable. Therefore, the order of your returns can play a big role in your retirement outcome in the long run.

This risk highlights the importance of careful planning, diversified asset allocation and maintaining flexibility in your withdrawal strategy. As an investor, planning for market volatility can reduce the negative impact of poor early returns and help preserve your retirement capital for the long term.

The uncomfortable truth about retirement in South Africa - Rands and Sense by 10X [video]

We sit down with 10X Investment Consultant lead Andre Tuck and discuss the retirement savings crisis in South Africa. We also delve into living annuities, retirement annuities, TFSAs and everything in between. Read more

Same returns, different order

Let’s look at a scenario to help illustrate the sequence-of-returns risk.

There are two retirees, each retiring with a capital amount of R5 000 000 and each with a drawdown rate of 4% per year (R200K). Both retirees achieve the same average investment returns over the course of their retirement.

The first retiree (retiree A) experiences strong initial returns and then poorer returns later on. The second retiree (retiree B) experiences poor initial returns early, followed by a period with stronger returns.     The sequence of their returns is very different, and this results in very different retirement outcomes. The first retiree’s living annuity thrives while the second retiree’s living annuity struggles to recover after the poor first few vital years, affecting their portfolio. Let’s take a closer look at the year-by-year retirement balances in a comparison table.

Both retirees start with R5 million and withdraw R200 000 (4%) per year.

Although the average returns are identical, the timing of these returns leads to dramatically different outcomes. The first retiree's annuity grows steadily and can sustain withdrawals comfortably, while the second retiree struggles to recover well from early losses, which significantly impacts the portfolio during the most important years. Even though both investors earn the same average capital return (6%), there is a difference of R2.2 million in retirement balances after 15 years.

As withdrawals continue during periods of poor early returns, there is less capital available to benefit from later market gains. The slow initial growth makes it a lot harder for the portfolio to fully recover, highlighting why the sequence in which returns occur can be just as important as the returns themselves.

How asset allocation influences sequence risk

Asset allocation plays the biggest role in the performance of your living annuity, accounting for over 90% of returns, as seminal research from Brinson, Singer, and Beebower shows, and can have an influence on your sequence-of-returns risk.

It’s crucial that you carefully consider your asset allocation to ensure that it is well-aligned with your investor profile and long-term financial objectives. Your asset allocation is usually a mix of equities, real estate (property), bonds and cash. Your choice of assets will ideally align with factors such as your risk tolerance levels and investment time horizons.

As an investor with 10X, you can choose from a selection of carefully curated investment funds, each geared towards different investor profiles. Each fund has a different mix of assets, and you can find one suited to your risk tolerance levels and time horizons.

Equities are the most volatile of the asset classes, but likely to produce the best returns over the long term. As data suggests, equities have historically produced returns above inflation by around 7% annually - over the long term (based on JSE All Share Index performance versus CPI from 1960-2020), but past performance does not guarantee future results. Bonds are more stable but may produce lower returns. Cash will most likely produce the lowest returns of all the asset classes, but it is the most stable of all.

We've built the 'happy retirement' machine

Understanding the most effective strategy for investing your retirement savings is fundamental to experiencing a happy retirement. We've built an investment machine that gives you a great chance of really golden years. Read more

You should be wary of investing too heavily in cash; this may mean lower returns, and ultimately, your portfolio may struggle to outperform inflation. A well-diversified portfolio including equities may allow you to balance both your risk versus return while still aiming for growth in the long term. The mix of assets you choose can influence your exposure to sequence-of-returns risk. A portfolio too heavily weighted in equities at the start of retirement may generate strong growth if markets rise, but withdrawals during early market declines can quickly reduce capital.

On the other hand, a balanced allocation with bonds or cash can help buffer against early losses, giving your portfolio a better chance to recover and maintain sustainable income over the long term. Regularly reviewing and adjusting your allocation can further help to manage this risk.

Further diversifying your portfolio offshore may allow you to take advantage of the additional opportunities that are available in the international market. This will also provide some protection against any local market instability and depreciation of the Rand. Living annuities are not subject to Regulation 28 of the Pension Funds Act, meaning you can invest your living annuity 100% offshore, if this is offered by your service provider. Here at 10X, we offer a range of carefully selected funds which allow investors access to a range of local and offshore assets. Please visit our funds page for the most up-to-date fund information. Fund information is correct as of the 13th of November 2025.

Where fees fit into the equation

Just as asset allocation can influence your exposure to sequence-of-returns risk, the fees that you pay on your living annuity can have a major impact on the long-term growth of your retirement capital. High fees may reduce your returns, which may mean you have less to reinvest and potentially continue to grow over time. If you have lower returns, coupled with high fees, this may mean you are at even greater risk of an unfavourable sequence-of-returns outcome. Lower fees, on the other hand, may mean more returns available to reinvest and potentially grow over time. Let’s look at an example to illustrate how fees can impact your real investment value. We will assume the following for this example:

• Investment amount: R2 million
• Investment period of 25 years
• Drawdown rate: 4%
• Return of 12% per annum
• An inflation rate of 6%

Example 1 (0.86% Fees): Real investment value is approximately R2.36 million.

Example 2 (3% Fees): Real investment value is approximately R1.45 million.

We can see the impact that a difference in fees can have on your real investment value when compounded over the long term. This example is for illustrative purposes only, and actual results may vary. You can learn more about fees here.

The 4% retirement rule isn't dead (but your investment fees might kill it)

4% has historically been a good rule of thumb when it comes to income drawn down from retirement investments such as a living annuity. But is it still relevant, and when might it be too much? Read more

At 10X, we are cost-effective and transparent when it comes to our fees. By making use of an index tracking investment strategy, we are able to keep fees on the lower end of the spectrum. Fees deducted are usually 1% or less, depending on the product chosen and the amount that you decide to invest. Please explore our product page for the most up-to-date fee information.

When looking at your fee spend, there are some typical fee deductions that you may see. These are as follows:

Management fees: These are the fees charged for the management of the fund.

Administration fees: Administration fees will be charged for the administration tasks related to the fund, such as reporting and tax activities.

Advisor fees: An advisor will charge for any advice and services that they provide. There will usually be an initial and an annual fee charged.

You should always be aware of your Effective Annual Cost (EAC). It is a standardised metric which was implemented by ASISA in 2015. The EAC refers to the total fees and costs that are involved with owning an investment over a one year period of time. The EAC can be viewed on your statement or you can request this from your service provider.

All factors being equal, you may find that a higher EAC means that there are less returns to be reinvested and allowed to compound over time. A lower EAC may mean that there are more returns available to be reinvested and allowed to compound over the long term. The EAC of your investment would be just one factor to consider when evaluating service providers.

At 10X, we offer a free suite of online tools which are useful resources for investors. Our EAC calculator is one of these tools, allowing you to compare the EAC you are being charged by your current service provider with the EAC charged by 10X.

A living annuity framework for retirees

Let’s have a look at a practical framework that you can apply to your living annuity. Having a plan such as this can help you to prepare for any kind of sequence-of-returns.

• Drawdown rate: When selecting your drawdown rate, you need to focus on sustainability - especially if you find yourself in a market downturn in your early retirement years. If your drawdown rate is too high, this may mean that your living annuity runs out too soon. A sustainable drawdown rate is generally thought to be about 4% by experts. Of course, if you are able to draw less than this, then even better.
• Fees: Understand your fees as a Rand value, not a percentage. Sometimes, this can be a retiree’s biggest single cost, and can help to show the real cost of high fees. Look to minimise fees as far as possible, potentially allowing for more returns to compound over time. Fees should be reviewed each year. Ensure that you request your EAC from your service provider and make use of this handy EAC calculator in order to compare and evaluate your EAC.
• Offshore exposure: Ideally, it makes sense to incorporate some offshore exposure in your portfolio to hedge against any political and local market instability that may occur in South Africa as well as any currency depreciation.
• Equities in your portfolio: Maintain an allocation to equities that aligns with your risk profile. While more volatile in the short term, equities generally offer the highest growth potential over the long term, helping to support sustainable retirement income.

Common mistakes to avoid

There are a few common mistakes that investors can make that you should look to avoid. These are as follows:

• Investing too heavily in cash, especially early on: Cash may produce lower returns that are unable to compete with inflation. For this reason, you may look to avoid investing too much of your portfolio in cash.
• Switching to cash after a market downturn: It can be tempting to switch to cash after a market downturn, but this may have the effect of locking in losses after the market recovers.
• Selecting a high drawdown rate without considering the longevity of your living annuity: It’s important to be mindful of your drawdown rate and the effect of this on the sustainability of your living annuity. If you have a drawdown rate that is too high, for example, 10% or 12%, this may mean that your capital depletes too quickly.

Final thoughts on sequence-of-returns risk

Sequence-of-returns risk cannot be completely avoided, as market fluctuations in the early years of retirement may be unavoidable. Key strategies include maintaining a sustainable drawdown rate, choosing a cost-effective provider with low fees, and selecting a well-diversified asset allocation that incorporates equities and aligns with your risk profile and long-term financial goals. A well-structured living annuity and a clear, well-thought-out financial plan generally leads to better retirement outcomes. Get in touch with the investment consultants at 10X today to start managing your living annuity with confidence.