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The Sustainability and Funding of Retirement Income


A living annuity poses two major risks for retirees, namely the outcome of investment returns over time and longevity risk. Retirees therefore need to understand the likely probabilities that their retirement income plans will be sustainable in the long run, i.e. providing inflation-adjusted retirement income for a considerable period after retirement. Drawdown (income) rates must be weighed up against possible investment returns.  One needs to understand how retirement income will be funded over time. The only two sources of retirement income are the proceeds from post-retirement investment returns and retirement capital withdrawals. The lower the drawdown rate and the higher the post-retirement investment returns, the more likely retirement income will be funded by post-retirement investment returns and not capital withdrawals. 


The most important objective of any retirement plan should be the ability to sustain one’s retirement income (annuity) for a prolonged period after retirement. Obviously, no one knows in advance how long one’s retirement income should last, but it is safe to assume longevity risk is real. People are living healthier lifestyles today and together with medical breakthroughs and advances they are living longer than ever before.


“Sustainability” refers to maintain one’s retirement income at least in real terms, thus considering and compensating for the diluting effects that inflation will have on the purchasing power of one’s retirement income over time.


A popular post-retirement product among annuitants is the investment-linked living annuity (ILLA) whereby consideration should be given to the drawdown rate at retirement and possible post-retirement investment portfolio returns. A typical question should be: Given the retirement capital available, drawdown (withdrawal) rate and post-retirement investment return, for which period will one’s retirement income be sustainable? Or, for how long will it be possible to escalate one’s retirement income by the inflation rate until one will reach the maximum allowable withdrawals per annum? [Currently capped at 17.5% drawdown per annum]


The purpose of this quantitative study is to provide an easy-to-use retirement planning guide. For example, to identify the most likely periods that one’s retirement income will be sustainable under certain drawdown rates and return assumptions. Therefore, I endeavour to illustrate the implications of various drawdown rates and/or post-retirement investment portfolio returns on the sustainability of one’s retirement plan.


In addition, I demonstrate how one’s retirement plan will be funded over its expected lifespan, i.e. how much of one’s retirement income will be paid by post-retirement investment growth & distributions relatively to retirement capital withdrawals. Obviously, the more one can fund one’s retirement income from post-retirement investment growth & distributions (and less capital withdrawals), the more sustainable one’s retirement plan will be over time.



Contents of publication:


Model construction


                 The accumulation of retirement capital

                 Post-retirement income


The sustainability of retirement Income


Sustainability and post-retirement investment growth & distributions


The funding of the first ten post-retirement years




The full report will be e-mailed upon request.



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