Have a budget in retirement, or you’ll outlast your money

Annuitants must draw as little as possible to ensure their capital will be sustainable in future.

Planning how you spend your money at retirement means you’ll have more room to enjoy your golden years. Sticking to a budget will cut down on stress and help you avoid one of the biggest mistake retirees make: spending too much of their nest egg too soon.

The rule of thumb of how much you need to live on in your later years is usually estimated at around 70% of your current income. But the reality is that people aren’t saving enough and they’re spending too much – all while they are living for longer and the cost of living is getting steeper. Change has become the only constant.

The 2018 Sanlam Benchmark survey highlights the differences between ideal savings behaviour and the reality:

  • People start saving too late (28 years of age vs the suggested 23).
  • People save too little (the average savings rate is 7% vs the suggested minimum of 15%).
  • 62% of individuals do not reinvest retirement savings at retrenchment or job changes.
  • 38% don’t get retirement saving advice.
  • 90% do not ever relook their pension options after initially signing up.


The only way pensioners will be able to escape this retirement conundrum – to make their income last – is to draft a budget in line with what they can afford.

It is also important to understand where the money is coming from as well. Many retirees draw too much income from retirement savings and, given expected longer life spans and rising fixed costs like medical and housing, may run out of funds.

Let’s look at two examples:

Person A is retiring with a nest egg of R6 million, at the age of 55. If he/she withdraws 5% (R25 000 per month gross income before tax) and the inflation rate is 5.2%, annual escalation is a 5.2% increase on the income, and not total income level (for example 5% will turn into 5.26%, etc) and expected annual returns will be 6.5% (net of fees, gross return will be 8%)

 Nominal terms: the value of the capital at that time

Real terms: the value of the capital taking inflation into account.


The table above illustrates that this person will reach the maximum income level at age 70 (meaning they will not be able to withdraw a higher amount). The reason for this is that an annual escalation has been implemented, at 5.2%. The risk is that if inflation starts to increase this percentage will be higher. The annual income will start to decrease, indicating that even a withdrawal rate of 5% in today’s markets is too high.

The same variables apply to Person B, however, starting at a withdrawal rate of 8% per annum (paid monthly) with an annual escalation at 5.2% as well.

Person B is withdrawing 8% per annum, with a 5.2 % annual escalation as per above. He/she will reach the maximum income level at age 62, roughly seven years after retirement, and their capital will start to deplete much more rapidly. At age 79 they will be left with roughly no capital at all, and a minimal monthly income.

Although there is no guarantee what the market will do and these examples are for illustrative purposes only, the message is clear: annuitants must ensure that they are drawing as little as possible to ensure that their capital will be sustainable in future. They must know that there is no turning back or going back to work once a capital base has been depleted. Having your children look after you or living off state benefits aren’t bright prospects either.

At this point of your life, it becomes imperative that individuals, together with their financial advisor, start planning income streams at retirement, based on the assets in their possession. This is also not a once-off exercise and individuals need to meet with their advisors regularly to review their portfolios and the general state of their finances, which includes the appropriate budget tools.

In the interim, the fact remains that investors need to acquire a completely new mindset around all retirement savings and subsequent spending; an advisor can provide guidance.

A planner will be able to project how long capital will last at retirement, based on income, expenses and personal financial expectations and formulate an appropriate investment plan to reach the desired lifestyle goals at retirement, without running out of capital before. Furthermore he/she will be able to continually adjust asset allocation of investments before and after retirement, with the objective of maximising growth and limiting loss over the long-term.

In your personal capacity, it is advisable to increase savings with immediate effect and start establishing more responsible spending habits. The more lavish your current lifestyle, the more retirement capital will be required to fund this in future.

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