The hidden retirement risk

Drawing too much, too soon

 

Yes, 7% may be too much, and the danger of high drawdowns is that they’ll leave you short of income in later years.

 

By Wouter Fourie (CFP®)
Director of Ascor® Independent Wealth Management.
Wouter Fourie is Past winner of the FPI Financial Planner of the Year competition and the co-author of The Ultimate Guide to Retirement in South Africa

 

A disciplined drawdown strategy – ideally starting at 4%-5% – helps retirees preserve capital, withstand market shocks, and maintain income for decades. When most South Africans retire, their focus shifts from building capital to drawing an income. But one of the most underestimated risks in retirement is the rate at which you draw down your capital.

 

On paper, drawing 7% or 8% of your portfolio each year may seem reasonable. After all, you’ve saved for decades, and it’s time to enjoy the fruits of your labour. The danger is that high drawdowns can quietly set you on a path to running out of money, even if investment returns are positive.

 

What is a drawdown rate?

Your drawdown rate is simply the percentage of your retirement capital that you withdraw each year as income. For example:

R5 million in capital

R350 000 withdrawn in year one

Drawdown rate = 7%

While the maths seems simple, the long-term impact is complex because it involves:

Inflation

Market volatility

Longevity risk (how long you live)

 

Why 7% is often too high

Research globally and in South Africa shows that sustainable drawdown rates are usually closer to 4%-5% per year. At 7% or higher, you risk depleting your capital much faster than expected.

Here’s why

Inflation compounds the problem

If inflation is 6%, your annual income needs to rise to keep pace. A 7% drawdown quickly escalates into 8% or 9% in rand terms.

Market volatility matters

If markets fall early in retirement, you may need to sell investments at low prices to fund income. This locks in losses, leaving less capital to recover when markets bounce back.

Longevity is increasing

Many South Africans underestimate their life expectancy. Planning to 75 or 80 isn’t enough. If you live to 90, a 7% drawdown may leave you with nothing in the last decade.

 

A simple illustration

Let’s compare two retirees with R5 million in capital:

Retiree A draws 7% (R350 000) per year.

Retiree B draws 4% (R200 000) per year.

Assuming modest investment returns and inflation of 6%, Retiree A may run out of money within 20 years. Retiree B, however, could sustain income for 30+ years.

The difference? Discipline.

 

Why lifestyle creep is dangerous

Many retirees spend more in the first decade of retirement on travel, renovations, supporting adult children. This is understandable, but without clear boundaries, it pushes drawdowns above sustainable levels.

A high-spending start can damage the long-term plan, especially if markets perform poorly in those early years.

 

How to manage drawdown risk

Start low, adjust later

Begin retirement with a conservative drawdown (4%-5%). If markets perform well, you can increase later.

Segment your assets

Keep 2-3 years of income in low-risk assets. This creates a buffer during market downturns.

Review annually

A static withdrawal plan ignores reality. At Ascor, we stress-test client portfolios annually against inflation, returns, and life expectancy.

Blend income sources

Consider combining a living annuity with a life (guaranteed) annuity. This ensures essential expenses are always covered, while maintaining flexibility with the rest.

 

Why independent guidance matters

Some advisors may downplay drawdown risks to “sell” a more attractive lifestyle projection. At Ascor, we believe in honesty upfront. If your current lifestyle isn’t sustainable, it’s far better to know now than to face financial stress later.

We are proud to have been the first firm in South Africa recognised as an FPI Approved Professional Practice™, a distinction now held by only 20 firms in South Africa. This recognition reflects our commitment to ethical, competent, and client-first financial planning.

 

What you can do now

If you’re already retired

Check your current drawdown rate. Is it above 5%?

Stress-test your income against different inflation and return assumptions.

Ask whether your spending today is sustainable if you live another 30 years.

If you’re nearing retirement

Model different scenarios before you start drawing.

Decide which expenses are essential and which are discretionary.

Work with an independent planner to design a flexible, sustainable withdrawal strategy.

 

In closing

Retirement should be about freedom, not fear. But freedom doesn’t come from ignoring the numbers, it comes from making them work for you.

A 7% drawdown may feel safe in year one, but it can quietly erode your security over time. By keeping withdrawals disciplined and plans dynamic, you give yourself the best chance of a long, confident retirement.

 

For more practical guidance, explore The Ultimate Guide to Retirement in South Africa.

Or visit www.ascor.co.za to start a conversation with a Certified Financial Planner® about building a sustainable retirement income strategy you can trust.

 

This article first appeared on moneyweb.co.za at https://www.moneyweb.co.za/financial-advisor-views/the-hidden-retirement-risk-drawing-too-much-too-soon/

 

Read more about Ascor® Retirement Planning Services

 

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