David Blanchett orginally published the idea of a “spending smile” in 2014 based on US data and he has recently published an update.

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Key takeaways

• Blanchett’s new work finds both a “smile” and a “smirk” in US data. The median retiree’s real spending declines steadily with no late-life rise (smirk); the average curls up late, lifted by the minority who are hit with large healthcare costs (smile).

• His practical conclusion: what matters is the decline itself. Modelling it supports initial withdrawal rates roughly 20% higher than assuming spending keeps pace with inflation for life.

• In our data, South African retiree spending does not increase with age, and may decrease. The average budget at 80 and older is about 15% smaller than at 65 to 69.

• What clearly changes is the composition. Transport and lifestyle spending fall; food and housing hold; health rises to about 11% of the budget. The reductions in some categories offset the increases in others.

• The survey covers households, not care institutions. Frail care sits outside this data entirely and could still have a large impact for many.

First, what Blanchett actually found

Using 20 years of US household data, he finds that which shape you see depends on which retiree you follow. Follow the median retiree, the person in the middle, and real spending declines steadily through retirement and keeps declining: a smirk, with no upward curl. If however you use the average across all retirees, you find that spending does turn up late in life, which is the original smile.

The difference is healthcare. A minority of households get hit with large medical and care costs late in life. Those shocks are big enough to pull the average up, even though they don’t happen to most households.

His conclusion is the useful part. Whichever shape you prefer, real spending declines for most retirees, even well-funded ones who could afford not to cut back, and building that decline into an income plan supports an initial withdrawal rate roughly 20% higher than the standard assumption of inflation-linked spending for life.

Let’s look at South African data next.

Spending in general doesn’t increase with age

Take the higher-income households in Stats SA’s Income and Expenditure Survey 2022/23, the top 30% by household income, with heads 65 and older. Average annual spending at 80 and older is about 15% below the 65 to 69 level, and there is no age band anywhere in the data where spending is higher than at 65 to 69.

That is the main finding. Spending doesn’t seem to increase with age, and for many will actually decrease.

What increases and what decreases

The chart compares budget shares for households headed by a 65 to 69 year old with those headed by someone 80 or older.

Look at what falls. Transport is about 28% lower at 80 and older, led by vehicle purchases and running costs. Eating out falls by around 44%. Recreation falls by around 61%. Clothing falls by a third. Every category that shrinks is one you can choose to shrink.

Now look at what doesn’t fall. Food spending is essentially unchanged at about 15%. Housing and utilities hold above a third of the budget in every age band. Insurance keeps its share. By 80 and older, food, housing, insurance and health make up about two-thirds of the budget, up from about 63% at the start.

But what about medical expenses?

It is common to assume that medical costs come to dominate the final years. Here is what the data measures, for households living at home.

Health spending is calculated as medical scheme contributions plus out-of-pocket costs. Counted together, health takes 8.3% of the budget at 65 to 69, 9.8% at 80 and older, and 11.4% at 85 and older. It rises certainly, but doesn’t seem to consume half your total budget as people often fear.

As would be expected, medical scheme contributions rise about 30% between 65 to 69 and 85 and older, while spending on life cover falls away. Out-of-pocket costs seem to fall: about 19% lower at 80 and older and about 36% lower at 85 and older. This pattern is also confirmed by the 2010/11 IES survey.

There is one caution to keep in mind with this survey. People living in frail care and other institutions are not in the survey at all. This data therefore says nothing about how many retirees need frail care, for how long, or at what cost, and Blanchett’s US work shows how large those late-life shocks can be for the households they hit. So keeping some reserve funds for unexpected expenses, including medical ones, remains a sound strategy at any age.

The bottom line

Here is what I want you to take with you. In South African data, retiree spending does not increase with age, and may in fact decrease: the average budget at 80-plus is about 15% smaller, and no age band spends more than the 65 to 69 group. What clearly changes is the composition. Transport and lifestyle fall, food and housing hold, health rises and the reductions offset the increases. That is the local version of what Blanchett now shows in the US: whatever the exact shape, the assumption that a retiree’s spending must rise with inflation for thirty years is not what retirees actually do.

I will keep digging into this dataset over time to see what it can further teach us.

If you would like to work through your own numbers, you can reach me at jonathan@rexsolom.co.za.

I work with clients in both English and Afrikaans.

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• Test it for yourself with this calculator.

• Across every case I tested the answer has the same shape: higher income while the allowance lasts, then level or slightly behind. Only the size and the duration change.

• The less of your wealth that already sits inside the retirement system, the more there is to gain.

• Consolidating more is not better. The benefit peaks at transferring half to three quarters of the discretionary pot to a living annuity.

• Two levers move the answer: the capital gains tax you pay to get in, which can cost more than the benefit it buys, and the asset allocation.

• This is not really a tax calculation. It is a decision about whether the front-loaded gain is worth giving up liquidity and control.

Last time, one number

In the first article on 10C I worked through a single household: R7 000 000 already inside a living annuity, R3 000 000 discretionary, all of which is then transferred into the living annuity. The answer came to a beneift of about R232 000 over thirty years, or 1.8% of lifetime income, arriving almost entirely in the first five years.

Read the first article to understand the method. Here are further considerations.

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The first lever: the tax to get in

In that first case the discretionary money was sitting in cash. Nothing had to be sold, which keeps things simple but isn’t what most people would experience. Discretionary money usually sits in unit trusts or shares that have grown, sometimes over decades.

To move appreciated assets you first have to sell them and pay capital gains tax, and that comes off your capital before the strategy has earned anything, so you spend the rest of your retirement drawing from a smaller base. Remember when you work it out that the gain forms part of your income for the year, sitting on top of what you are already drawing and taxed at the top rate you reach, which makes it larger than most illustrations suggest.

The second lever: what the money is invested in

The first article set out why this matters. Outside the annuity, interest is taxed every year at your marginal rate while dividends and capital gains are taxed at relatively low levels. Inside the annuity, interest, dividends and capital gains come back to you as income, which is taxed at higher rates. So money that generates interest gains from the move, and money that grows in value instead of paying out can end up behind. A bond-heavy pot tends to win. An equity-heavy pot can lose.

The grid below holds the asset allocation at a 40% bond ladder, which is roughly what it takes to fund a 5% income for the first eight to ten years.

Twenty households, one page

Each row below is a household arriving at retirement with R10 000 000, split differently between retirement money and discretionary money. Each column moves a different share of the discretionary pot across. Find the row that looks most like your own balance sheet and read across it (or use this calculator on your own numbers).

Every cell shows the same thing: the year-by-year difference consolidating makes to your after-tax income, green where you are ahead and red where you are behind, with the lifetime total and the entry tax underneath.

What generalises

The first thing is that the shape never changes. All twenty cells show a block of higher income while the allowance lasts, then very little. What varies is how tall that block is and how long it runs, from two years at the top of the grid to fifteen at the bottom.

The second is that the benefit rises steadily as retirement money falls. You have the most to gain if most of your assets are in discretionary vehicles.

The third is that more is not better. In every row the benefit peaks at half or three quarters of the discretionary pot, then falls away when you consolidate the lot, because the entry tax keeps climbing while the benefit does not.

The fourth is that the lifetime numbers stay small throughout. The best cell on the whole grid adds 5.9% to lifetime income, and it gets there by locking away R5 000 000 of a R10 000 000 household.

The decision you are actually making

Put those together and 10C stops being a tax question. Every cell is offering the same bargain in a different size: a few years of higher income now, in exchange for money you can no longer reach.

That is a trade between a benefit you can measure and one you cannot. The income gain is a number on a page. Liquidity is the ability to fund a medical event, help a child, move country, or simply change your mind, and to hold money in your own name outside a system whose rules will not stay still for thirty years. Longevity, then Liquidity, then Legacy: liquidity ranks above tax, which means the tax gain has to be large enough to justify spending a higher priority to buy a lower one.

There may be estate planning reasons

There is an estate dimension too, since money inside a living annuity is treated differently on death, which has merit but I haven’t covered here. Where we stand is simple enough: life is for the living, and we would not arrange your money to suit your estate at the expense of an outcome that suits you better while you are alive to enjoy it. So think about that first and only then optimise the estate taxes.

Where I leave it

Your grid is not this grid. Your split is different, your base cost is different, your asset mix is different. So rather than guess which cell you are nearest, put your own figures into the 10C calculator and see what your household produces.

My take is that this is a real strategy that has sufficient benefit that you should consider it carefully. But its not automatically a good strategy for everyone, even if its often sold that way. Whether it suits you comes down to how much you value liquidity and control and each person has to weigh that for themselves.

If you would like help working through this for your own retirement, get in touch: jonathan@rexsolom.co.za

I work with clients in both English and Afrikaans.

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Retirement spending consists mostly of recurring monthly expenses. But there are also big, once-off costs sitting in the years ahead: the car that needs replacing, the roof, a medical procedure, the milestone trip. These are not emergencies. They are known, dated, and you have a good idea what they will cost. A ladder built to match your cash flows can fund them on purpose, by buying a bond that comes due right when the money is needed.

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Key takeaways

• A bespoke ladder can fund a large once-off expense as precisely as it funds your monthly income: a dated bond for a dated need.

• A large once-off withdrawal is sequence-of-returns risk at its most concentrated: forced to sell into whatever the market is doing on a single date. The bond ladder removes that, for the big expense just as for the income.

The ordinary income ladder

Start with the plain version. Say you need R40 000 a month for the next 10 years. A ladder that funds exactly that, using the real market prices of South African government bonds on 8 July 2026, holds a spread of bonds maturing in turn, from the R187 bond in December 2026 out to the R209 bond in 2036, each timed to hand over the income for the months ahead. Nothing is sold into a market: the cash arrives because the government contracted to pay it.

Adding the year-five expense

Now say you also know you will spend R1 000 000 in five years: a new vehicle, a major renovation, a trip you have promised yourself. Not a vague “maybe”, a real line item.

We can build that into the ladder by buying a specific bond to meet the expense on the date it is required. On today’s prices, the R213 SA government bond is added, maturing at the end of February 2031. The return of capital from that bond lands a few months before the expense and pays for it in August 2031: you buy the bond that comes due just before you need the money, and hold the proceeds until the day arrives.

The chart shows an example of this ladder. Every blue rung is a bond that funds a stretch of monthly income. The one enlarged rung in 2031 is the deliberate addition: a bond to fund that once-off cost. Throughout, your monthly R40 000 continues without a ripple, right through the expense.

One thing to notice. Securing R1 000 000 for year five does not cost R1 000 000 today. It costs roughly R675 000: set it aside now, and the bond’s yield of about 8% turns it into the full million by 2031. That discount is the reward for funding a known cost early, with certainty, rather than scrambling for it later.

The once-off is the dangerous part

Here is why this matters more than convenience. Sequence-of-returns risk, the reason the years around retirement are so fragile, is the damage done when you draw from a portfolio that has just fallen: you sell units cheaply, and the capital you sell never shares in the recovery. It is the subject of The Retirement Coin-Flip.

Your monthly income is fully exposed to it. Drawing R40 000 month after month through a downturn is precisely the fragile-decade danger, and the reason the ladder exists: it funds those years from maturing bonds, so you never sell into a falling market to eat.

A large once-off expense is that danger at its most concentrated: a single big withdrawal on one date, with none of the spreading that many small withdrawals allow. If your R1 000 000 falls due in a month the market is down 25%, you sell a third more units than at par to raise it, and that capital is gone for good. Worse, a year-five expense lands inside the fragile decade, the first ten years that drive roughly 80% of your outcome, explored in The Chart That Should Change How You Think About Retirement. Large, concentrated, and early is the worst combination there is.

Matching, not hoping

A balanced fund has one move when the roof needs doing: sell units at whatever the market offers that month. It cannot target a rand amount on a date; it was never built to. A bucket approach gets closer, holding cash, then bonds, then equities in tiers, but those tiers are sized by time horizon, not matched to a date and amount. It can hold bonds; it does not hold the bond that comes due, as cash, the month you need R1 000 000. When the date arrives, you are still deciding what to sell.

The matched ladder removes that decision. Because you hold the R213 bond, maturing February 2031, the R1 000 000 is already cash before the expense falls due, whatever the market is doing that year. You are not a forced seller on a bad day, for the roof any more than for the groceries. The same structure that protects your income through a crash, the subject of How to Survive a Market Crash During Retirement, protects your largest, most exposed withdrawal the same way. That is asset dedication: engineered, not hoped.

The big once-off costs are the riskiest part of your retirement spending, not the smallest. They are exactly what a matched ladder is built to fund: to the rand, on the date.

If you would like to see a ladder built around your own income and your own future costs, get in touch: jonathan@rexsolom.co.za

I work with clients in both English and Afrikaans.

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Let’s see whether this strategy has merit.

Key takeaways

• “Tax-free” means the tax-free return of your own capital. The allowance equals what you put in, and runs out once you have drawn it back.

• The real benefit is deferral of the tax on interest and dividends you would otherwise pay each year outside the annuity. It loses though by taxing capital gains as income.

• For the retiree in this exmaple, the benefit is modest: about +R232 000 on R10 000 000 over 30 years, roughly 1.8% of lifetime income, and front-loaded.

• The cost is liquidity, which ranks above tax.

How it works

Say you have R3 000 000 in a discretionary investment: shares, unit trusts, cash. You move it into a retirement annuity, then a living annuity, annuitising the whole amount and taking no lump sum.

Section 10C of the Income Tax Act gives you a tax-free allowance equal to what you put in. Contribute R3 000 000 and you create a R3 000 000 allowance. Your withdrawals come out tax-free until they add up to that R3 000 000. After that, every further rand is taxed as normal income. So the “tax-free income” is the tax-free return of your own capital, and it lasts only until you have drawn back what you put in.

Where is the benefit, if it is only your own capital coming back? Your money outside is not sitting still. It earns interest and dividends, taxed every year whether you spend them or not: interest at your marginal rate above the annual exemption (R34 500 for those 65 and older), dividends at 20%. Inside the annuity, that income compounds untaxed and is taxed only when you withdraw. You pay tax eventually, but after years of untaxed compounding. That deferral is the benefit.

There is a catch, pointing the other way. Outside, capital growth is taxed gently: as a capital gain at an effective ceiling near 18%, only when you sell. Dividends are taxed at 20%, and no more. Inside the annuity, every rand you withdraw is income, taxed at up to 45%. So consolidation defers the tax on interest and dividends, which helps; but it swaps the flat 20% on dividends for income tax on the way out, and re-rates capital growth from a gentle capital gain into income. Whether it nets to a gain or a loss depends on the asset mix. A bond-heavy pot tends to gain; an equity-heavy pot can lose. That question will get its own future article.

Putting numbers to it

Picture this case: R7 000 000 already inside a living annuity, and R3 000 000 in discretionary capital. Hold the rest at sensible settings: 40% bonds, a 5% withdrawal rate, 4% inflation, drawing proportionally from both pools, the discretionary money in cash, which means there is not capital gains tax to pay to get into the living annuity.

Move the full R3 000 000 in, and over a 30-year retirement you end up about R232 000 ahead in today’s money: only about a 1.8% improvement in total income over a 30 year retirement horizon. The shape is important to consider:

For the first five years, while the allowance is full, consolidating pays about 17% more, tapering to about 13% in the sixth year as the allowance runs out. Then it is gone, normal tax applies, and for the remaining twenty-four years you sit slightly behind, by about 1% to 3% a month at first, easing towards zero with age. The early gain outweighs the long, mild shortfall, which is how you reach +R232 000. Both cases draw the same income before tax: this is about when the tax is paid, not how much you receive.

There is a practical catch in that early benefit. It is not paid to you monthly. The platform still deducts PAYE at the normal rate, and the exemption is only applied when you file your annual assessment, so it arrives as a refund after the tax year. A retiree who needs a fixed amount each month may draw more to meet it, then spend the refund when it lands, and much of the saving could leak away.

The cost is liquidity

To capture the saving, you move money you could reach into a structure you cannot, available only as income within the 2.5% to 17.5% drawdown limits. This is the commutation decision in reverse: taking a lump sum turns locked capital into accessible capital; 10C does the opposite.

That is why the longevity, liquidity, legacy order matters. Liquidity ranks above tax. Our retiree already has R7 000 000 locked in the annuity, so the R3 000 000 outside is effectively their whole cushion. Moving it to gain 1.8% spends a higher priority to buy a lower one. For someone with a smaller annuity and a larger discretionary pot, the trade could make sense. Consolidation is not wrong everywhere; it is wrong when you fund it with liquidity you cannot afford to lose.

Where this goes next

The +R232 000 is one point on a wide range. There are multiple levers that change the outcome that I will cover in future. Estate planning also deserves some consideration.

For now, Section 10C is best understood not as tax-free income but as a tax-free return of your own capital: front-loaded, modest, and funded by giving up liquidity. That makes it a tool for particular circumstances, not a default.

If you are weighing this decision and would like to see where your own numbers land, get in touch: jonathan@rexsolom.co.za

I work with clients in both English and Afrikaans.

Each of those choices is defensible in isolation. The trouble is they pull against each other, and pulling on all of them at once leaves you stuck. What is missing is not more information. It is an order of priority: a way to decide which goal wins when two sensible ones collide, and to quantify the trade-off as much as possible.

This piece is about our framework for thinking through that order of priorities. It is the lens through which we build every retirement income plan.

Key takeaways

• A retirement income plan has to answer three questions, and we answer them in a fixed order: Longevity, then Liquidity, then Legacy.

• The order is a tie-breaker. When the 3 Ls pull against each other, and they usually do, the earlier priority wins.

• Every trade-off between them has a price. Our approach tries to measure that price, so that you choose with your eyes open.

The three questions

Longevity: will the money last? Your capital has to produce a rising income for as long as you live, through whatever the markets do along the way, and in whatever order those returns happen to arrive. This is the question that matters most, because a plan that runs dry has failed at the only thing that was non-negotiable. Tax belongs here too. The income tax you pay each year in retirement reduces what you actually have to spend, so tax efficiency is not only an estate matter, but it feeds directly into how long the money lasts.

Liquidity: can you reach the money when you need it? Plans change. Emergencies arrive. A health event, a child who needs help, a roof that fails, an opportunity worth taking. Liquidity is having the right money available at the right time. It is one of the most underrated parts of a retirement plan, and one of the easiest to give away by accident, usually in the pursuit of a tax saving.

Legacy: what is left, and how efficiently does it pass on? This is largely a question of tax and structure: how your estate transfers, and how much of it survives the journey. It is real money, and it matters to most people. It is also, in the strict sense, an optimisation laid on top of the first two.

Why this order

The sequence is not a ranking of what matters most to you. For some people, leaving something behind is the most emotionally important thing of all. Others value liquidity above almost everything. The order is a rule for resolving conflicts and giving weight to each trade-off.

Longevity comes first because nothing else matters if the income fails. Liquidity comes second because a plan with no give in it forces bad decisions at the worst moments. Legacy comes last for a simple reason: life is for the living. It makes little sense to prioritise what happens after you are gone over the life you get to lead while you are here. When these trade-offs collide, the earlier one wins.

The trade-offs have a price

Almost every hard retirement decision is a contest between these three lenses.

Take the choice between a life annuity and a living annuity. A life annuity is close to unbeatable on Longevity: a guaranteed income for life, paid at a higher rate than you could safely draw yourself, because the pool shares longevity risk and those who die early subsidise those who live long. But it answers Longevity by surrendering the other two. Your capital is gone, so there is no Liquidity and little Legacy. A living annuity is the mirror image. It keeps your capital accessible and passes whatever remains to your heirs, so Liquidity and Legacy are intact, but it hands the longevity risk back to you and pays a lower safe income in return.

The point the framework forces into the open is that the living annuity’s liquidity and legacy are not free. You buy them, either with lower income or with more capital: you need a larger pot to fund the same lifestyle safely while keeping access and a bequest. So whether you can afford a living annuity is, precisely, the question of whether you have enough capital to pay for the liquidity and legacy you want without putting longevity at risk.

Or take the commutation decision at retirement. The tax-efficient instinct is to take only the tax-free lump sum. But a retiree with very little accessible capital may be right to take a larger lump sum and pay more tax, because the liquidity is worth more than the tax saved. Here Liquidity outranks tax optimisation, and the order says so plainly. We do not chase tax efficiency when it compromises access.

What we always try to do is avoid making these trades blindly. We run the numbers to measure the cost of trading one priority for another. We can put a number on what locking money away to save tax costs you in liquidity, or on what a guaranteed income costs you in legacy. The choice remains yours. It should be made knowing the bill.

So what

The value of naming the 3 Ls is not to crown one of them as the priority that always wins. All three matter, and the right balance between them is different for every person. The value is to make the trade-offs visible and the priorities deliberate, so that no decision quietly sacrifices something that mattered more.

This is the lens through which we approach every plan, and it sits behind the full process we use to engineer a retirement income plan. The next time a decision feels stuck, the most useful question is rarely “what is the optimal answer?” It is “which of the 3 Ls am I really trying to protect here, and what am I giving up to do it?” Answer that, in this order, and the hard choices get easier to reason about.

Get in touch at jonathan@rexsolom.co.za.

I work with clients in both English and Afrikaans.

It is a familiar process, and a poor one for retirement income planning.

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Last week I looked at the return assumption that drives most planning tools. This week is about another input that drives the conventional process: the questionnaire that determines the allocation.

Key takeaways

• The academic evidence for risk tolerance questionnaires is inconclusive. No single tool has been shown to reliably predict how an investor will behave in a real drawdown.

• Even if a questionnaire worked perfectly, it would still be the wrong starting point. A retirement income plan is a liability-matching problem, not a personality assessment.

• Asset Dedication makes the question unnecessary. The allocation is derived directly from the income required.

What the research actually says

The literature on risk tolerance questionnaires is large and mixed. Three issues recur.

Test-retest reliability is the first. Many widely-used tools fall below the standard psychometric threshold. The same investor, answering the same questions, can produce materially different scores within months.

Second, the gap between what investors say and what they do. Studies comparing questionnaire responses to actual investing behaviour have found correlations so low they barely qualify as a relationship.

Third, and most relevant for retirees, risk tolerance is not stable across market regimes. The CFA Institute and others have documented that scores shift meaningfully during market stress. An investor labelled “moderate” in a calm market is not necessarily “moderate” the week after a 20% drawdown.

The evidence does not provide confident grounds for letting a 12-question survey determine a 30-year asset allocation. It might tell us something useful. It is not strong enough to be the anchor.

Even if the questionnaire worked, it would be the wrong starting point

Risk tolerance questionnaires exist primarily as a compliance instrument. They satisfy a regulatory suitability requirement and create an audit trail. That is not the same thing as a diagnostic tool for a 30-year income plan.

A retirement income plan is fundamentally a liability-matching exercise. You have a stream of future income obligations across a long horizon, and the portfolio’s job is to fund them. This is how pension funds and life insurers think: start with the liability, structure the assets to meet it.

The questionnaire-driven process asks a different question: given your appetite for volatility, what is the maximum expected return we can give you? It says nothing about whether the income you need will arrive when you need it. The right question is: what does the portfolio need to do, and how do I build something that will do it?

Feelings are real. Decisions are separate.

A common defence of the questionnaire is behavioural: without it, clients will sell at the bottom during a drawdown and destroy their plan.

A questionnaire is a poor predictor of what someone will actually feel during a real drawdown. And adults can feel fear without acting on it. Selling at the bottom is a choice. A good plan helps clients not make that choice. The questionnaire is not what does that work. The structure of the plan is.

The Asset Dedication answer

When the plan starts with the goal, the allocation falls out of the maths.

Take a retiree with R10 million who needs R500 000 per year of inflation-linked income. Ten years of that income, funded by a bond ladder, requires roughly R4 million at current yields. The remaining R6 million goes to a diversified equity portfolio.

That is one retiree. Another, with different capital or a different income need, will land somewhere different. The split is engineered to match the liability, not borrowed from a model portfolio.

The question of whether you feel “moderate” or “aggressive” does not enter the calculation.

So what?

Watch where a retirement income conversation starts. If it begins with a feelings questionnaire and ends with a model portfolio, the plan is being built backwards. If it begins with the income required and reasons forward from there, the rest follows.

I am not against asking how clients feel about volatility. I am against letting the answer determine what their retirement looks like.

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Get in touch for advice on your retirement income plan: jonathan@rexsolom.co.za

I work with clients in both English and Afrikaans.

The problem is that single return assumption. Get it right, and the plan is a useful guide. Get it wrong, and it’s a comfortable fiction.

I’ve built a calibration table that connects the return assumption in a simple planning tool to the probability of success from a Monte Carlo simulation: 10,000 randomly generated market scenarios, a 60% equity portfolio, and a 30-year retirement horizon. This lets us answer the question: when you plug in a return number, what are you actually saying about the odds?

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Key takeaways

• A real return assumption of 3.5% or lower maps to a plan with better than 90% probability of success. That’s the “green zone.”

• A 4% real return assumption corresponds to roughly 85% probability of success: a reasonable, well-calibrated starting point for most retirees.

• Above 4.5% real, the probability drops sharply. A plan built on 5% or 6% real returns may look fine on paper, but the odds are increasingly against it in the real world.

• Volatility imposes a penalty on withdrawal rates that a straight-line tool cannot capture. Even if your portfolio achieves a 7% real return over 30 years, the path it takes to get there means your sustainable withdrawal rate is materially lower than 7%.

Why a straight-line return assumption is misleading

Here’s the core issue. A spreadsheet assumes the portfolio earns a steady return every single year. In reality, returns are volatile: some years are strong, some are deeply negative, and the order of those years matters enormously. This is sequence of returns risk which I’ve written about it before.

When you are withdrawing income from a portfolio, bad returns early in retirement do permanent damage. Capital lost early never gets the chance to compound. This is why a portfolio that averages 7% real over 30 years cannot safely support a 7% withdrawal rate. The volatility along the way is a tax on the withdrawal rate, and no simple planning tool accounts for it.

A Monte Carlo simulation does. By running thousands of possible return paths, it captures what the spreadsheet misses: the penalty that volatility imposes on a decumulating portfolio.

The calibration table

The table below maps each real return assumption (nominal return minus income escalation) to the implied probability of success over a 30-year horizon at 60% equity.

The spending strategy assumed here is the combined “Smile and Forgo” approach: spending steps down naturally in the later decades of retirement (the retirement smile), and the inflation increase is skipped in any year where the market was negative (the forgo rule). I’ve covered both of these in detail in previous articles.

Note: The implied initial withdrawal rate is not an arbitrary input. It is derived mathematically from the real return assumption using the annuity formula for a 30-year horizon. It represents the exact withdrawal rate at which a straight-line planning tool would show your plan as 100% funded at that return assumption. Each row is therefore internally consistent: the return assumption, the withdrawal rate, and the probability of success belong together. If your actual withdrawal rate differs from the implied rate shown, the probability in that row does not directly apply to your situation.

The pattern is clear. Below 3.5% real, you’re in the green zone: better than 90% probability of success. At 4% real, you’re in amber territory: roughly 85%, which is a sensible and well-calibrated position for a flexible retiree. Above 4.5%, the odds deteriorate quickly. By 6% real, your plan has only a 34% chance of surviving the full 30 years.

For clarity, assuming a 10% annual return and an inflation assumption of 5% is effectively assuming a 5% real return.

The temptation to “solve” the problem on paper

This is where the danger lies. If a plan doesn’t work at 4% real, it’s tempting to push the return assumption to 5% or 6%. The spreadsheet will oblige: it will show the plan as fully funded. But the calibration table reveals what that assumption actually implies. At 5% real, you’re accepting a 61% probability of success. At 6%, it’s 34%. The plan hasn’t been fixed. The assumptions have been loosened until the answer looks acceptable.

A higher return assumption isn’t a strategy. It’s a hope.

A note on flexibility

This analysis assumes the retiree is willing to be flexible: allowing spending to decline naturally over time and skipping the inflation increase after a negative market year. I’ve shown previously that this flexibility is not particularly costly: the typical retiree skips the inflation increase about 3 times in 30 years, and over 87% of simulated scenarios the flexible strategy delivers higher total lifetime spending than the rigid alternative.

But flexibility must be genuine. If your essential expenses consume all of your retirement income and there is no room to adjust, then these probabilities do not apply to you in the same way. In that case, a living annuity may not be the right vehicle for all of your income and a guaranteed annuity should likely be considered. The flexibility assumption is not a free upgrade; it requires that your spending structure can actually absorb the adjustment.

Finding the balance

The calibration table is about honesty, not pessimism. An assumption of 2% real is conservative enough that almost no one would fail, but it’s also so restrictive that it may force you to live on less than you can comfortably afford. The answer isn’t to plan for the worst case. It’s to plan with clear-eyed realism about what each assumption implies.

For most retirees with a diversified 60% equity portfolio and genuine spending flexibility, a real return assumption between 3% and 4% strikes a sensible balance: a probability of success between 85% and 96%. That’s the range where the plan is robust without being unnecessarily punitive.

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Get in touch for advice on your retirement income plan: jonathan@rexsolom.co.za

I work with clients in both English and Afrikaans.

But a sharp question came back: does that finding hold for every withdrawal strategy, or is it specific to rigid inflation-adjusted spending? What if you use a more flexible approach? Does that shift the danger zone?

Let’s test.

Key Takeaways

• I tested four withdrawal strategies: constant inflation, retirement smile, forgo inflation adjustment, and a combination of smile and forgo.

• The shape of the risk curve barely changes. Across all four strategies, years 1 to 10 explain between 80% and 83% of the spread in outcomes. The danger zone is structural. No withdrawal strategy moves it.

• Flexible strategies do raise your sustainable income meaningfully. That’s valuable. But they don’t change when you’re most vulnerable.

• The bond ladder case is not contingent on a specific withdrawal strategy. It works because the vulnerability window is fixed.

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The Test

I used the same setup as last week: 10,000 hypothetical retirements, same 60% equity portfolio, same 30-year horizon. Crucially, every strategy faces the exact same set of market returns. The only thing that changes is how the retiree adjusts their spending.

The four strategies, briefly:

• Constant inflation: increase your withdrawal by inflation every year, regardless of what the market does. The textbook baseline.

• Forgo inflation adjustment: skip the inflation increase in any year where the market return is negative. (I wrote about this in detail here.)

• Retirement smile: reduce spending by 10% at year 10 and again at year 20, reflecting the well-documented pattern that retirees naturally spend less as they age.

• Combined: apply both the smile reductions and the forgo rule together.

For each strategy, I found every retiree’s maximum sustainable withdrawal rate, then measured how much of the spread in outcomes traces back to each year’s market return. Same methodology as last week.

The four lines sit almost on top of each other. The shape is remarkably stable.

Why This Happens

I expected the flexible strategies to flatten the curve: spread the risk more evenly across years, make the early period less dominant. The opposite happened. On reflection, the logic is clear.

The retirement smile reduces spending from year 10 onwards. That means the later years’ returns matter even less, because you’re drawing less from the portfolio during those periods. The outcome becomes more concentrated in the years where spending is at its peak: years 1 to 10.

The forgo strategy barely shifts the curve at all. It skips an inflation adjustment after a bad year, which is a helpful adaptation. But it’s modest enough that it doesn’t meaningfully redistribute which years carry the most weight.

The combined strategy shows the highest concentration of all: 83% in the first decade, with year 1 alone explaining 15%.

The Practical Implication

This finding strengthens the case for the Asset Dedication approach, not because the vulnerability window is bigger, but because it’s universal. It doesn’t matter which withdrawal strategy you prefer. The first decade dominates regardless.

Flexible spending rules are valuable. They raise your sustainable income meaningfully. That’s worth having. But they solve a different problem. They improve efficiency. They don’t move the danger zone.

A bond ladder covering years 1 to 10 neutralises the danger zone directly. Flexible spending makes the overall plan more efficient. The two are complementary, not substitutes. The best plans use both.

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If you missed last week’s article, start there.

If you’re new, The Fragile Decade Masterclass walks through the complete framework.

Get in touch for advice on your retirement income plan: jonathan@rexsolom.co.za

I work with clients in both English and Afrikaans.

One of you runs out of money. The other dies with R15 million in the bank.

Same savings. Same average returns. Wildly different outcomes. The only difference? The order in which those returns arrived. This is sequence of returns risk, and it is the single most important concept in retirement income planning.

I wanted to quantify exactly when this risk is most dangerous: which years of retirement create the biggest gap between the lucky and the unlucky? So I ran the numbers.

Key Takeaways

• Take 10,000 identical retirees. The difference between the ones who run out of money and the ones who don’t, traces back overwhelmingly to what happened in the first few years.

• Year 1’s return alone accounts for 13% of the spread in outcomes.

• The first 5 years account for 52%.

• The first 10 years account for 80%.

• After year 20, what the market does in any single year barely registers.

• A bond ladder covering years 1 to 10 is not a conservative choice. It is an engineered response to where the data says the risk is concentrated.

The Analysis

The methodology here is adapted from research by Wade Pfau, Professor of Retirement Income at The American College, who first demonstrated this pattern using US market data. I’ve replicated his approach using South African capital market assumptions.

Here’s what I did. I created 10,000 hypothetical retirements: same starting capital, same 60% equity portfolio, same 30-year horizon. The only thing that differs between them is the sequence of market returns they experience. For each one, I calculated the maximum withdrawal rate that would have sustained the income for the full 30 years.

Some of these hypothetical retirees could safely draw over 9%. Others couldn’t sustain more than 3%. Same portfolio. Same average return. Dramatically different outcomes.

Then I asked: what explains the gap? Specifically, for each year (1 through 30), how much of the difference in outcomes can be traced to the market return in that particular year?

The results are striking. Year 1’s return alone accounts for 13% of the total difference in outcomes. Year 2 adds another 12%. By year 5, you’ve already explained more than half of the difference between the best and worst outcomes. You can see this in the chart by adding up the numbers above each column for the first 5 years.

To be precise about what these numbers mean: they don’t say that 80% of your retirement “depends” on the first 10 years in some absolute sense. They say that when you compare retirees who ended up wealthy to those who ran out of money, 80% of the difference between them traces back to returns in the first decade. The later years matter for compounding, but they don’t create the gap. The first decade does.

The intuition is straightforward. Early in retirement, your portfolio is at its largest while you’re simultaneously drawing income. A 20% market drop on R10 million costs R2 million in absolute terms. That same 20% drop fifteen years later, on a smaller remaining balance, costs far less. The damage is front-loaded.

So What Does This Mean for You?

The standard industry approach to retirement income is to put you in a balanced fund and hope for the best. The implicit assumption is that over 30 years, things will average out.

They do average out. But the chart above shows that the averaging happens too late. By the time the good years arrive to “balance” the bad ones, the damage from early losses has already compounded through decades of withdrawals. The back half of your retirement barely moves the needle, while the front half is almost everything. (If you want to see what this looks like in real time, last week’s article showed exactly how this risk plays out during a market crash.)

This is the core logic behind the Asset Dedication approach we use at Rexsolom. We build a bespoke bond ladder that covers years 1 to 10 of your income needs with individual bonds maturing to match each year’s withdrawal. Your equity portfolio sits untouched during this period, given time to compound and recover from any early drawdowns. (And yes, you can build this directly inside a living annuity.)

Think of it this way: if 80% of the gap between retirement success and failure is created in the first 10 years, and your income during those 10 years is already locked in, then you have structurally neutralised the single largest risk to your retirement.

That is not hope. That is engineering.

If you’re new here, The Fragile Decade Masterclass walks through the complete framework in six parts. If you’re already retired and want to check whether your current withdrawal rate is still sustainable, this chart will help.

Get in touch for advice on your retirement income plan: jonathan@rexsolom.co.za

I work with clients in both English and Afrikaans.

• If you define “success” as simply not running out of money over 30 years, a 60% equity portfolio can sustainably support a 4.3% withdrawal rate. On a R10 million portfolio, that is R430 000 per year.

• If you insist on preserving 100% of your capital in real terms (i.e. leaving behind the same purchasing power you started with), that rate drops to roughly 2.2%. That is R220 000 per year. Nearly half the income.

• Preserving 50% of your real capital is a more moderate goal, costing about 1 percentage point of withdrawal rate.

• Flexible withdrawal strategies help at every level, but the advantage narrows as the preservation target increases.

The hardest shift in retirement

For most of your working life, the goal was simple: accumulate. Save more, invest well, watch the number grow. Decades of discipline built the portfolio you have today.

Then you retire, and the goal flips completely. Now you need to spend it.

This is, for many people, the single hardest psychological transition in retirement. The instinct to protect your capital does not switch off because you have reached a certain age. I see it regularly: retirees who have more than enough to live comfortably, but who cannot bring themselves to draw down their savings.

The purpose of that capital was never to sit untouched. It was to fund the life you want to live: the travel, the time with family, the freedom to say yes. Spending it is not failure. It is the plan working exactly as intended.

But I also understand the desire for a safety margin. Some clients want to know they could leave something meaningful behind. Others simply sleep better knowing the capital is still largely intact.

So let’s put a number on it.

What capital preservation actually costs

Using the same simulation framework from this previous article, I tested what happens when “success” is no longer defined as simply having money left at the end of 30 years. Instead, I required the portfolio to end with a minimum balance: 25%, 50%, 75%, or 100% of its starting value in today’s rands.

The results are striking.

For the standard constant-inflation withdrawal strategy (60% equity, 90% probability of success), the safe withdrawal rates to preserve different percentages of your starting capital, in today’s money, is show in the table.

As an example, if you want to have a high chance of having half your initial portfolio (in today’s money) left after 30 years, you would need to reduce your withdrawal rate from 4.3% to 3.3%.

Each row is a choice. The question is how to balance these competing goals - spending now or preserving the capital - likely for someone else.

Flexibility still helps

In the previous articles, I showed that flexible withdrawal strategies (like forgoing an inflation adjustment after a bad year) can meaningfully increase your starting income. That remains true here, but the benefit shrinks as the preservation target rises.

At 0% preservation, the most flexible strategy (combining the retirement smile with the forgo rule) delivers a 5.3% withdrawal rate, compared to 4.3% for the rigid approach. That is a 23% advantage.

At 100% real preservation, all four strategies converge to between 2.2% and 2.7%.

Finding your number

Most retirees do not need to preserve 100% of their capital. Many do not need to preserve any of it. The right number depends on your specific goals: whether you want to leave an inheritance, whether you have other assets outside the portfolio, and how much comfort you draw from seeing a healthy balance.

What the data shows clearly is that the hurdle of keeping your portfolio fully intact in real terms is a high one, which has real trade-offs for your quality of life during retirement.

Your capital was built to fund the retirement you want. The travel. The time with family. The freedom to say yes. Spending it is the plan working as it was designed.

Before you go

Whenever you are ready, here are 3 ways I can help you:

1. Work through my Retirement Income Blueprint

2. Create a one-page financial summary: I’ll send it to you within a few days with some high-level feedback

3. Contact me at jonathan@rexsolom.co.za and let’s start a conversation.

   (I work with clients in both English and Afrikaans)

Notes

All results assume a 60% equity portfolio, a 30-year time horizon, and a 90% probability of success. “Real terms” means adjusted for inflation. The analysis uses Monte Carlo simulation with 10 000 scenarios per data point, based on forward-looking return assumptions for South African and global assets.

• By agreeing to skip your annual inflation increase after any year in which your portfolio posts a negative return, you can start with a withdrawal rate of 4.8% instead of 4.3%. On a R10 million portfolio, that is R480 000 vs R430 000 in year one.

• In exchange, you will typically skip an inflation adjustment about 3 times over a 30-year retirement.

• The longest streak of consecutive skips is almost always just 1 year. You skip once, get your increase the following year, and carry on.

• Despite the occasional skipped increase, this strategy delivers more total real spending in about three quarters of all scenarios, compared to the constant inflation adjustment scenario.

I’ve previously shown that a retiree with a 60% equity portfolio and a 30-year time horizon can sustainably withdraw about 4.3% of their starting capital, adjusted for inflation every year, with a 90% probability of success.

I also showed that by introducing flexibility (specifically, by forgoing the inflation adjustment after a negative-return year) you could increase that starting rate to 4.8%. That is a 12% increase in year-one income.

The question that was left unanswered: how often would you actually have to skip?

The rule

The rule is simple. Each year, you look at your portfolio’s return for the prior year. If it was positive, you give yourself the full inflation increase. If it was negative, you hold your withdrawal flat in rand terms for one year. That is it. No complex formulas, no discretionary judgement calls.

What it costs you

I ran 10 000 simulated retirement scenarios, applying both strategies to the exact same set of market outcomes. Here is what I found:

Three numbers stand out.

First, the typical retiree skips just 3 times in 30 years. That is once per decade. Even in a bad-luck scenario, you skip 5 times. That means you still received your full inflation increase in 25 out of 30 years.

Second, the longest consecutive streak of skips is overwhelmingly just 1 year. In 78% of scenarios, you never experience two skipped years back-to-back.

Third, despite those occasional skips, the forgo strategy delivers more total real spending in 87% of scenarios. The higher starting point creates a lead that the constant increase strategy almost never claws back over 30 years.

How to think about this

The constant inflation approach offers certainty: your real income is the same every year, no matter what markets do. That is appealing. But the price of that certainty is a permanently lower starting income.

The forgo approach asks you to absorb a modest, temporary pause in your income growth after a bad market year. For a retiree who can tolerate the occasional flat year, the numbers are clear: start higher, spend more in total, and only rarely have to forgo your inflationary increase.

This is not an all-or-nothing decision. It is a conversation about how much flexibility you are willing to build into your plan, and what that flexibility is worth in rand terms. The answer, for most retirees, is that it is worth quite a lot: 12% more income on day one, and more total spending over a lifetime, in exchange for holding steady roughly once a decade.

If that trade-off interests you, it is worth exploring how it fits into your specific retirement plan.

*See the Appendix for more detailed charts

Before you go

Whenever you are ready, here are 3 ways I can help you:

1. Work through my Retirement Income Blueprint

2. Create a one-page financial summary: I’ll send it to you within a few days with some high-level feedback

3. Contact me at jonathan@rexsolom.co.za and let’s start a conversation.

   (I work with clients in both English and Afrikaans)

Notes

• Throughout this article, “average” refers to the median (the middle outcome when all 10 000 scenarios are ranked from worst to best).

• “Typical range” refers to the 10th and 90th percentiles: the outcomes that mark the boundary between the best 10% and worst 10% of scenarios.

• “Bad-luck scenario” refers to the 90th percentile of skips (i.e. only 10% of scenarios were worse).

• The analysis uses Monte Carlo simulation: a technique that generates thousands of possible market return sequences based on forward-looking assumptions for returns, risk, and inflation. Each of the 10 000 scenarios represents one possible 30-year retirement, with randomly generated annual returns. A strategy “succeeds” if the portfolio still has money left after 30 years. Both strategies shown here achieve approximately a 90% success rate.

Appendix: Detailed charts for the technically inclined

The charts below provide the full distributional detail behind the summary table above.

Chart 1: Distribution of skipped years

This histogram shows how the total number of skipped years is distributed across 10 000 simulated retirements. The distribution is centred on 2 to 3 skips, with a long but thin right tail. Fewer than 6% of scenarios see more than 5 skips.

Chart 2: Longest consecutive skip streak

This chart addresses the psychological question: “Will I have to endure many years of flat income in a row?” The answer is almost certainly no. 78% of scenarios never see more than 1 consecutive skip. 98% see a longest streak of 2 or fewer.

Chart 3: Cumulative real spending

The top panel shows median cumulative real spending for both strategies. The forgo strategy (red) leads throughout. The bottom panel shows the percentage of scenarios where the forgo strategy is ahead on total cumulative spending. It starts near 100% and gradually declines, but remains above 80% even at year 30.

This week I present a single chart designed to answer that question. It combines two factors: how long your money still needs to last, and how much certainty you need that it will.

Key takeaways

• The “safe” withdrawal rate depends heavily on your remaining time horizon. A 75-year-old with 20 years ahead can sustain a much higher rate than a 65-year-old with 30.

• If your withdrawal rate has drifted above the traditional benchmarks, this chart helps you assess whether that is actually a problem, or whether it is perfectly fine given your shorter horizon.

• If returns have been strong and your rate is still low, you may have room to increase your income.

• For the growing number of South Africans retiring at 70 or 75, the 30-year “4% rule” was never the right reference point in the first place.

Why “forgo inflation adjustment” is the default

Before getting to the chart, a word on the withdrawal strategy used. Rather than the rigid approach of increasing your income by inflation every single year regardless of what markets have done, this analysis uses a simple, practical alternative: if your portfolio had a negative return last year, you skip the inflation increase.

That is it. One rule. In practice, most people have experienced years when their salary did not keep up with inflation. This is no different. You are not cutting your income; you are simply holding it flat for a year after a bad market.

This small concession meaningfully improves sustainability. It is easy to implement, requires no complex calculations, and as I’ve previously shown, it increases the safe withdrawal rate by roughly half a percentage point compared to rigid inflation increases. All the numbers that follow use this approach.

The chart

The analysis uses 1,000 randomly generated market scenarios, a balanced 60% equity portfolio, and the forgo inflation adjustment rule described above. It was run across five time horizons (10, 15, 20, 25, and 30 years) and nine probability of success thresholds (10% to 90%).

Each line represents a different time horizon. The vertical y-axis is the sustainable starting withdrawal rate. The horizontal x-axis is the probability of success, which I’ve argued is better understood as the probability that you won’t have to make any adjustments.

How to use this chart

This is not a chart you look at once at retirement and file away. It is a reference you return to periodically.

Scenario 1: Your rate has drifted higher than expected. You retired at 65 with a 4.8% withdrawal rate targeting 90% success over 30 years. Ten years in, your inflation-adjusted income now represents 6.5% of your remaining portfolio. That sounds alarming if you are still comparing to the original 4.8%. But look at the 20-year line: at a 70% probability of success, the sustainable rate is 6.8%. You are not in trouble. You are on a trajectory that gives you a 70% chance of needing no adjustment at all over the next 20 years, and a 30% chance of needing some course correction. That may be perfectly acceptable.

Scenario 2: Returns have been strong and your rate is low. You are 75, your portfolio has grown, and your current withdrawal rate sits at 4.5%. The 20-year line shows that even at 90% success, you could sustain over 6%. You have meaningful room to increase your income during the years when you are most likely to enjoy it.

Scenario 3: You retired later. An increasing number of South Africans are working into their late 60s or early 70s, whether by choice or necessity. If you start drawing income at 70 with a 20-year horizon, the 30-year “4% rule” was never designed for you. Your starting reference is the 20-year line, where even the most conservative 90% threshold supports over 6%.

The bottom line

A retirement income plan benefits from periodic check-ups, just like your health. Circumstances change: portfolios grow or shrink, spending patterns evolve, and your remaining horizon gets shorter every year. This chart gives you a way to take a reading at any point and assess where you stand. Not to make a snap decision, but to have an informed conversation about whether your current income is sustainable, whether you have room to spend more, or whether a course correction is warranted.

Before you go

Whenever you are ready, here are 3 ways I can help you:

1. Work through my Retirement Income Blueprint

2. Create a one-page financial summary: I’ll send it to you within a few days with some high-level feedback

3. Contact me at jonathan@rexsolom.co.za and let’s start a conversation.

   (I work with clients in both English and Afrikaans)

I’ve previously shown that for a balanced portfolio (60% equity) over 30 years, targeting a 90% probability of success gives a starting withdrawal rate of around 4.3%, rising above 5% with flexible spending strategies. The success threshold was fixed at 90%. What if 90% is more conservative than you need?

Key takeaways

• A 90% probability of success is really a 10% probability of needing to make an adjustment at some point over 30 years.

• Lowering the required success probability increases the starting withdrawal rate: from 4.3% at 90% to 5.5% at 50% for the baseline strategy.

• This is not a licence for recklessness. Withdrawal rates above 7% push into territory where the odds are too unfavourable.

• The right probability depends on how much of your spending is discretionary and your willingness to cut back if markets disappoint.

What was tested

The methodology is identical to the original study: 1,000 randomly generated 30-year market scenarios, a 60% equity portfolio, and the same four withdrawal strategies. The only change: instead of varying the equity allocation, it was fixed at 60% and the required probability of success was varied from 10% to 90%.

The pattern is intuitive: accept a lower probability of success and you can start with a higher income. Under the constant inflation adjustment strategy, the safe withdrawal rate rises from 4.3% at 90% to 5.5% at 50%. The flexible strategies push these higher, The combined “Smile & Forgo” approach allows approximately 6.5% at 50% success.

On a R10 million portfolio, the difference between 4.3% and 5.5% is R120,000 per year.

Reframing “failure” as “adjustment”

The word “failure” does a lot of heavy lifting here. A 50% probability of success sounds like a coin flip on financial ruin. It is not.

A scenario “fails” if the portfolio runs out at any point within 30 years. But the metric treats all failures equally: running short by R1 in year 29 counts the same as being depleted in year 10.

A more useful interpretation: a 90% probability of success is a 10% chance you will need to adjust your spending at some point over 30 years. At 70%, a 30% chance. At 50%, even odds. These are probabilities that something in your plan will need to change, not probabilities of catastrophe.

How large would any required adjustment be? I can’t say yet. Quantifying the magnitude and timing of adjustments is a topic for future research. It is reasonable to expect though, that lower success probabilities correspond to both a greater chance of needing to adjust and requiring larger adjustments.

When does a lower probability make sense?

The answer hinges on the composition of your spending. Consider two retirees, both drawing R50,000 per month.

Retiree A has R45,000 in fixed expenses: bond repayments, medical aid, insurance, rates and taxes. Only 10% is discretionary. There is almost no room to cut. Targeting 90% success is prudent.

Retiree B has R25,000 in fixed expenses and R25,000 in discretionary spending: travel, entertainment, gifts, dining out. If markets disappoint, this retiree can meaningfully reduce spending without compromising their basic standard of living.

For Retiree B, a lower success probability can be seen as a deliberate trade-off: more income now, during the early years when health and energy allow, with the ability to pull back if needed. If things go well, you will have enjoyed more. If not, you have room to adjust.

The limits

This is not an argument for reckless spending. The chart makes the boundaries clear.

A 7% withdrawal rate under the baseline strategy corresponds to roughly a 10% probability of success: a 90% chance of needing adjustment, and likely a substantial one. An 8% or 10% rate does not appear on the chart at all because the probability of sustaining that income for 30 years is negligible. If you are tempted by rates in that range, you would almost certainly need to cut your income significantly, and probably sooner rather than later.

The realistic sweet spot sits between 5% and 6% for retirees with genuine spending flexibility.

The bottom line

The data points to a straightforward conclusion. If your fixed expenses consume most of your retirement income, a 90% success threshold is the right target and your starting withdrawal rate should be below 5%. If you have more discretionary spending then rates as high as 6% might be defensible, provided you are prepared to act on that flexibility when it matters, not just claim it in good times. The difference on a R10 million portfolio could be over R100 000 per year. That’s a meaningful improvement in quality of life, bought with a willingness to adapt.

Before you go

Whenever you are ready, here are 3 ways I can help you:

1. Work through my Retirement Income Blueprint

2. Create a one-page financial summary: I’ll send it to you within a few days with some high-level feedback

3. Contact me at jonathan@rexsolom.co.za and let’s start a conversation.

   (I work with clients in both English and Afrikaans)

This decision often causes enormous anxiety. Take a large amount and you feel like you are paying too much tax. Take too little and you feel trapped: your wealth is locked inside a living annuity with regulated withdrawal limits, and you have no liquid reserves for emergencies or opportunities.

I don’t think there is a perfect lump sum. Many people are advised to take only the R550,000 tax-free portion. It is a simple answer. But months later, you may feel stuck without a bit more liquidity.

Here is what most people miss: the living annuity is itself a liquidity tool. You can draw between 2.5% and 17.5% of your balance each year. That upper limit gives you real room to build liquid assets over time, even after a conservative commutation. In other words, your liquidity creation decision doesn’t have to be a once-off event. You don’t have to feel like you need to get it right, else there’s no second chance. Like just about everything in life, you can adjust the plan when things change.

Testing the Theory

I modelled two people, both retiring with R10 million:

• Person A takes R3 million as a lump sum, pays R808,000 in lump sum tax, and starts with R2.19 million in discretionary investments alongside a R7 million living annuity. Each year, 5% is drawn from each pool. The LA withdrawal is taxed as income; discretionary withdrawals are assumed to be tax-free (the growth rate is reduced to account for taxes - see notes at the end). Year 1 after-tax spending: about R414,000.

• Person B takes only the R550,000 tax-free lump sum, putting R9.45 million into the living annuity. Each year, Person B draws 10% from the LA. After paying income tax and matching Person A’s net spending, the surplus is transferred into discretionary investments. The discretionary pool is not touched for income; it compounds as a growing liquid reserve.

Once Person B’s discretionary balance catches Person A’s, Person B drops to the same 5% withdrawal rate from both pools. The 10% LA draw is a temporary catch-up tool, not a permanent plan.

What the Numbers Show

Person B starts with R1.6 million less in discretionary assets. But by drawing 10% from the living annuity and channelling the after-tax surplus into discretionary investments, the gap closes steadily. By Year 6, Person B’s discretionary balance overtakes Person A’s, and Person B drops to the same 5% withdrawal rate.

Both people draw 5% gross from their pools after convergence. Person B’s after-tax spending is slightly lower post-switch (about R6,000 per year less) because Person B’s living annuity is smaller after the catch-up phase. This is the honest cost of the strategy: a modestly smaller LA in exchange for liquid assets outside the retirement wrapper.

Person A pays less income tax each year (because part of the spending comes from the tax-free discretionary pool) but paid R808,000 in lump sum tax on day one. Person B pays more annual income tax during the catch-up years (the full 10% LA draw is taxed) but paid zero lump sum tax. By Year 10, Person B has paid about R340,000 more in cumulative tax.

Person A retains about R210,000 more in total wealth at Year 10, but that difference sits inside the living annuity. Person B has more in accessible, flexible discretionary assets. That is the genuine trade-off: locked wealth versus liquid wealth.

What This Really Means

Every model rests on assumptions. Your growth rates, inflation, tax position, and personal circumstances will differ. The exact crossover year will shift. That is expected and beside the point.

The structural insight holds regardless: creating liquidity can be a process, not a single decision.

The living annuity’s flexible withdrawal range is a powerful mechanism. It should always be used responsibly, but if you need more accessible capital, you can temporarily increase your withdrawal rate, channel the surplus into discretionary investments, and then step back to a sustainable rate once your liquidity target is met.

You do not need to get the commutation decision perfectly right on day one, because you can adjust course over the following years.

The cost is real but manageable: higher income tax during the catch-up period, a somewhat smaller living annuity balance, and slightly lower income after the switch. In return, you gain liquidity, flexibility, and the peace of mind that comes from having accessible capital outside a retirement wrapper.

If you took a conservative commutation and now feel stuck: you are not. The living annuity can fund your income and build your liquidity at the same time.

And it only takes a few years, not a lifetime.

Before you go

Whenever you are ready, here are 3 ways I can help you:

1. Work through my Retirement Income Blueprint

2. Create a one-page financial summary: I’ll send it to you within a few days with some high-level feedback

3. Contact me at jonathan@rexsolom.co.za and let’s start a conversation.

   (I work with clients in both English and Afrikaans)

Notes

Model assumptions: R10m fund value, age 65, LA growth 10%, discretionary growth 9% (to account for tax drag on investment returns outside retirement vehicle), 2025/26 SARS income tax tables, no other taxable income.

Many people assume that retirement vehicles limit you to unit trusts and balanced funds. This isn’t the case. Many platforms allow you to hold individual government bonds, equities, and ETFs directly within your living annuity, just as you would in a discretionary portfolio.

This is one of the key differentiators in how we build retirement income plans: we construct the same bespoke bond ladder structure inside both your retirement and discretionary capital.

A Quick Refresher on the Framework

The Asset Dedication approach splits your portfolio into two jobs. The Income Portfolio is a bond ladder that funds your living expenses for the next 8 to 10 years. This provides certainty: you know exactly when each bond matures and pays out, regardless of what equity markets do. The Growth Portfolio holds equities, giving your capital the time it needs to compound and fight inflation.

This structure directly addresses sequence of returns risk: you are unlikely to ever sell equities at depressed prices because the bond ladder covers your near-term needs.

Ideally, you start building this ladder before retirement, adding rungs year by year so you arrive at retirement with a fully funded 10-year income stream. Waiting until retirement day risks a market downturn just before you retire, forcing you to sell equities at the worst possible time.

Finally, as outlined in the Retirement Income Blueprint, you should maintain both a retirement pot (living annuity) and a discretionary pot, withdrawing proportionally from each. This preserves liquidity for emergencies and optimises your tax position over time.

One Structure, Two Wrappers

Here is the critical point: the internal architecture of your living annuity and your discretionary portfolio should be identical.

If your bond ladder holds R2030, R2032, R2035, and R2037 government bonds, the same bonds appear in both pots in the same proportion. If your growth portfolio holds a global and local equities, the same holdings appear in both pots. The allocation percentages mirror each other exactly.

The only difference is the tax wrapper around them.

A Worked Example

Consider someone aged 65 with R10 million in total capital: R6 million in a living annuity and R4 million in discretionary investments.

They need R500,000 per year in pre-tax income (a 5% withdrawal rate). Following the proportional withdrawal rule, they draw R300,000 from the living annuity and R200,000 from the discretionary portfolio.

The living annuity income is taxed according to the standard income tax tables (after rebates for someone over 65 and rounded for the sake of simplicity). The discretionary withdrawal attracts a blended effective tax rate of roughly 10% between tax on interest, dividends and capital gains.

Note: people often assume there is no tax on discretionary withdrawals. This is not true. However, the effective rate is typically far lower than the marginal rate applied to annuity income.

How the Money Flows

In both pots, your income is paid from the bond ladder. As bonds mature and pay coupons, the cash flows into your bank account to cover living expenses.

The growth portfolio has one job: replenish the ladder. When equity markets deliver positive returns, we harvest gains and purchase a new 10-year bond, extending your income runway. When markets are negative, we do nothing. You continue drawing from the existing ladder while waiting for the growth portfolio to recover. This discipline prevents selling equities at a loss.

The diagram below illustrates the structure:

The Bottom Line

You are not limited to balanced funds inside your living annuity. You can build a bespoke bond ladder using individual government bonds, paired with a dedicated growth portfolio, exactly as you would with discretionary capital.

By mirroring the structure across both pots and withdrawing proportionally, you maintain liquidity, optimise tax, and most importantly: you secure your income against the volatility that poses the greatest threat during the Fragile Decade.

Before you go

Whenever you are ready, here are 3 ways I can help you:

1. Work through my Retirement Income Blueprint

2. Create a one-page financial summary: I’ll send it to you within a few days with some high-level feedback

3. Contact me at jonathan@rexsolom.co.za and let’s start a conversation.

   (I work with clients in both English and Afrikaans)

So here’s a concrete example, followed by a reference table where you can find your own situation.

The Basic Maths

You retire with R1 million. The market drops 20%. You now have R800,000.

To recover to R1 million, you need R200,000 on an R800,000 base. That’s a 25% return.

Now add reality: you need R50,000 to live on. You withdraw it. Your portfolio is now R750,000.

To recover to R1 million, you need R250,000 on R750,000. That’s a 33% return.

Same market decline. But the withdrawal turned a 25% recovery into a 33% one. That’s not a rounding error but rather a fundamentally harder problem.

The Recovery Table

How to read it: Find the market decline on the left. Find your withdrawal rate across the top. The cell shows the return required to get back to where you started.

A few scenarios worth noting:

• 20% decline, 5% withdrawal: You need a 33% return to recover. That’s the scenario most retirees face in a bad year.

• 30% decline, 5% withdrawal: Now you need 54%. That’s not recovering next year. That’s hoping for a strong multi-year run.

• Two consecutive bad years: If year one is down 20% (and you withdraw 5%), then year two drops another 15% (and you withdraw again), you’re looking at needing a 70%+ return to get back to your starting point. The table compounds.

Why Withdrawals Change Everything

Look at the 20% decline row. Without withdrawals, you need 25% to recover. With a 5% withdrawal, you need 33%. With 7%, you need 37%.

Each withdrawal percentage adds roughly 3 to 4 percentage points to your required recovery. That doesn’t sound like much until you realise those extra points compound over multiple bad years.

This is sequence of returns risk made concrete. The withdrawals force you to sell shares at depressed prices. Those shares never participate in the recovery. The hole gets deeper.

What To Do With This

This table isn’t meant to scare you. It’s meant to clarify the problem so you can solve it.

The solution is structural: don’t be forced to withdraw from equities when they’re down. A bond ladder covering 8-10 years of income means your withdrawals come from maturing bonds, not from selling equities at the worst possible time.

When markets drop 20%, you’re in the “No withdrawal” column for your equity portfolio. You need 25% to recover, not 33%. When markets drop 30%, you need 43%, not 54%.

That difference, where you aren’t selling assets at a loss, is the crucial difference that changes a crisis into par for the course.

Save This

Bookmark this table. Next time markets drop and the headlines turn grim, come back and find your scenario. Then ask yourself: am I being forced to sell, or do I have a structured investment strategy that was built exactly for this reality?

Before you go

Whenever you are ready, here are 3 ways I can help you:

1. Work through my Retirement Income Blueprint

2. Create one page financial summary - I’ll send it to you wihin a few days with some high level feedback

3. Contact me at jonathan@rexsolom.co.za and let’s start a conversation (I work with clients in both English and Afrikaans)