The Rule of 4%: Will Your Retirement Savings Last?

As your retirement approaches, one question looms larger than any other: "Will my money last?" It's a worry that keeps many South Africans awake at night. And whether retirement is just around the corner or still years away, knowing how much you can safely withdraw from your savings could mean the difference between comfort and anxiety once you retire.

That brings us to the 4% rule - a widely used guideline for retirement withdrawals.

What exactly is this rule, and does it make sense for South African retirees? Let's dig into the details and, more importantly, see how fees and other factors affect your retirement income.

Understanding the 4% Rule

Here's what the 4% rule tells us: take 4% of your retirement savings in your first year, adjust that amount for inflation each year after that, and you're looking at money that should last 30 years or more. This isn't just a number pulled from thin air - it comes from research done by financial adviser William Bengen in 1994, who analysed decades of market data to find a withdrawal rate that could survive even the worst market conditions.

Let's make this real with an example:

Say you've built up R9 million in retirement savings. Following the 4% rule, you could withdraw R360,000 in your first year (that's R30,000 monthly). Each year after that, you'd increase this amount to keep pace with inflation.

There is one important caveat: this rule assumes your savings stay invested in a diversified portfolio of growth assets like equities, bonds, and property throughout retirement, not just sitting in cash. Why? Because a diversified portfolio of growth assets has historically beaten inflation, which is vital for maintaining your buying power over a long retirement.

Why 4%?

The magic of the 4% rule isn't the number itself - it's what that number represents. It's a withdrawal rate that's weathered all sorts of market conditions:

• Market crashes
• Periods of high inflation
• Long bear markets
• Different economic cycles

And that's something that catches many retirees off guard: your investment returns likely won't come in a neat, straight line. They'll bounce up and down from year to year. The 4% rule is built to handle these bumps, even if you hit poor market returns right after you retire (what experts call sequence of returns risk).

The Hidden Impact of Fees

While the 4% rule gives us a useful framework, it's not the whole story. Another factor that can make or break your retirement plan is investment fees. Remember, your retirement savings typically stay invested in growth assets throughout retirement. This approach aims to generate returns that can support your income while fighting inflation. But here's the catch - fees directly impact how much you can safely withdraw.

So how do fees actually affect what you can withdraw? Let's break it down:

• If you're paying 1% in annual fees, you could potentially withdraw 4% each year
• But with 3% annual fees, you'd need to drop that withdrawal rate by about 2%, i.e. down to around 2% annually

What does this mean in Rand terms for a R9 million retirement portfolio?

• At 1% fees: You could potentially draw R30,000 monthly (4% withdrawal)
• At 3% fees: You'd need to cut that to just R15,000 monthly (2% withdrawal)

That's not just a number on paper - it's the difference between maintaining your lifestyle and having to make serious compromises.

The Golden Equation

This brings us to something we at 10X call the "golden equation" for retirement sustainability:

Investment Returns - Fees - Inflation ≥ Withdrawal Rate

Let's plug in some numbers. If your investments earn 11.5% before fees:

• With 1% fees: 11.5% - 1% - 5% (inflation) = 5.5% potential sustainable withdrawal rate
• With 3% fees: 11.5% - 3% - 5% (inflation) = 3.5% potential sustainable withdrawal rate

The 10X Your Future Fund aims to deliver returns of 5.5% above inflation over rolling 5-year periods, with low fees helping to maximise the portion of returns that actually reach your wallet.

Protecting Your Purchasing Power

Here's another reality check: inflation matters - a lot. That R30,000 monthly income won't buy nearly as much in 20 years. In fact, to keep the same purchasing power:

• You start with: R30,000 monthly
• You'll need: roughly R80,000 monthly after 20 years (assuming 5% inflation)

This is precisely why growth assets and global diversification matter, even in retirement. The 10X Your Future Fund currently maintains a 35% offshore exposure (with the ability to increase this to 45%), while investors seeking higher international exposure can consider other 10X funds for up to 100% offshore equity exposure.

Making It Work for You

While the 4% rule is a good starting point, your personal sustainable withdrawal rate depends on several factors:

• Your investment fees (lower fees mean you can draw down more)
• Your investment strategy and comfort with risk
• How long you expect to need the money
• Your lifestyle and spending needs

Tools to Help You Decide

Working out your personal sustainable withdrawal rate doesn't have to be guesswork. 10X offers several free tools to help:

• Living Annuity Calculator: See the long-term impact of different retirement scenarios
• Comparison Report: Compare 10X's fees and returns to your current provider
• Living Annuity Quote: Get a comprehensive picture of what the 10X Living Annuity offers from our consultants

Next Steps

Understanding withdrawal rates is crucial for retirement planning, but you don't have to figure it out alone.

Talk to a 10X investment consultant to:

• Review your current retirement strategy
• See how fees affect your long-term outcomes
• Explore solutions that fit your retirement goals

Remember, while the 4% rule provides a useful framework, your situation might call for a different approach. The key is understanding what affects your retirement sustainability so you can make informed decisions about your future.