IN A NUTSHELL: Retirement comes with risks you can’t control — from living longer than expected to market ups and downs and rising inflation. What you can control is how you prepare. Understanding the different annuity options and choosing one that matches your risk appetite can help you protect your income for life.
Retirement has many uncertainties. Even a good lump sum can lose value or run out fast if you don’t plan for the whole picture of your life. Here are the five biggest risks you should know about and the annuity choices that can help you manage them.
RISK 1: Unpreparedness
Unlike most retirement risks, this one starts long before you retire. Many people know they should save for retirement, but it feels distant — something to worry about “one day.” That delay can be costly, because the earlier you start saving and planning, the stronger and more secure your financial future will be.
Common mistakes people tend to make are underestimating their retirement needs and overestimating their preparedness. People often think they can rely on others when they retire, but do you really want to put that additional pressure on your adult children? Many retirees make critical financial decisions without consulting a financial adviser. This often leads to poor planning and missed opportunities.
How to reduce this risk: Prioritise retirement planning. Financial advice is readily available. You can’t control markets, inflation or how long you’ll live — but you can control how you prepare. Speak to a financial advisor once you start earning money and regularly review your retirement plan. Understand your annuity options for retirement and ask your financial advisor to test different income scenarios to see how long your savings will last.
RISK 2: Longevity risk — Outliving your savings
Have you ever worried that you could outlive your savings? Medical advances mean many South Africans spend 25–30 years in retirement. That’s good news for life — but tough news for your savings.
How to reduce this risk: Consider a life annuity once you retire. This type of annuity pays a guaranteed income for as long as you live. It provides various choices for annual increases, but most importantly, it is a pension for life, no matter how long you live or how markets perform. If you want security and flexibility, then consider a blended annuity — part of your money buys a guaranteed income for life, which can serve as a safety net, while the rest stays invested for growth or to leave to beneficiaries.
RISK 3: Unpredictable markets — When markets drop, your income can too
Some people prefer the flexibility of living annuities. A living annuity is an investment product where the value of your retirement capital can go up or down depending on the performance of a range of underlying assets. When markets fall, the value of your investment decreases. As a result, your income drops. The opposite is also true.
How to reduce this risk: Spread your money across various investments and assets. Avoid withdrawing too much too soon. A blended annuity (a combination of a life and a living annuity) can help balance risk and reward in retirement — giving you a steady guaranteed income paid monthly while a portion of funds is invested for long-term growth.
Ace draws 5% income from a living annuity of R1 million. He receives R50 000 annually (R4166 per month). The next year, the markets struggle and his capital reduces by R100 000. He continues to draw 5%, but now only gets R45 000 annually (R3750 per month).
In this context, withdraw and drawdown mean the same thing — they both refer to the annual amount of money you take from your living annuity as income.
RISK 4: Inflation — Rising prices eat away your buying power
Inflation means that R3 000 today won’t buy the same monthly groceries in ten years. Even small yearly price increases can erode the value of your income. Income should aim to keep pace with inflation at least (notwithstanding that medical inflation can be higher).
How to reduce this risk: Choose an annuity that grows with inflation. An inflation-linked life annuity increases your income each year in line with the Consumer Price Index (CPI). It’s complicated, but inflation-linked annuities are more “expensive” as insurers need to factor in higher future increases. This means that the starting income will be lower than other options in this category.
A fixed escalation annuity will have a higher starting income. This type of annuity increases by a set percentage of your choice (like 5%) each year, giving you predictable, steady growth, but this may be less than inflation in some years.
An alternative option is a with-profit annuity, where annual increases are linked to the smoothed performance of a balanced fund, meaning that increases will be good (often higher than inflation) in good years, but not as good when investment markets don’t perform as well. However, with-profit annuity increases are expected to outpace inflation over the long term, which will help protect buying power. Below is a summary of the annuity types.
Note the difference in starting incomes. The with-profit annuity has the lowest starting income, but in the long run it surpasses the other types.
With-profit annuities
Increases are investment-driven – these have outperformed in the long-term
RISK 5: Behavioural — The danger of your own decisions
Many retirees are victims of their own choices – they take too much or too little risk, draw down too much income, or panic when markets fall. Emotional decisions can derail even the best plan. Once retired, review your income choices every year alongside your financial advisor.
How to reduce this risk: The right combination of annuity products can protect you from these risks while giving you peace of mind. If you prefer certainty and less decision-making, a life annuity removes some of your risks entirely. A life annuity covers longevity and behavioural risk. A living annuity offers flexibility but needs discipline and careful drawdown. A blended annuity combines both, offering lifetime income security and investment growth potential.
Retirement should be a time of joy and reflection, not worries. With knowledge and planning, you can build an income that lasts, grows and supports you through your later life.
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