Abstract:
In this paper we present guidelines for safe withdrawal rates from a living annuity (income drawdown accounts), periodically, to cover living expenses. In essence, a retiree is faced with the risk management problem of outliving their retirement fund (withdrawing too much) versus living below their means (withdrawing too little). The empirical evidence in the literature advocates for a ‘safe’ 4% annual withdrawal (or spending) rate. Therefore, the object of this paper is to examine withdrawal rates for retirees in the South African economy. Furthermore, we carry out a simulation study using historical data while incorporating longevity and fund management fees. Our analysis emphasises the risks associated with different withdrawal rates and asset allocations. We then give an example of how derivative instruments can increase the success rate of a retirement portfolio.
