When planning for retirement – or for any investment from which you intend draw an income – the assumptions you make around returns, fees and taxation are critically important.
These variables ultimately determine the sustainability of your income and the longevity of your capital.
An expected return of around 10% per annum is a reasonable and realistic assumption for a well-diversified balanced portfolio.
Read: Kganyago sees inflation around 3% in 2026
Such a portfolio typically includes exposure to cash, bonds and equities, both locally and offshore. A common allocation would be 30-40% in defensive assets (cash and bonds) and 60-70% in growth assets (equities and alternatives).
Most balanced strategies are managed with a return objective of CPI plus 6-7%, although this can and should be tailored to your specific circumstances – particularly your income requirements, risk tolerance, and investment horizon.
Active management is essential to ensure the strategy continues to support your income needs through varying market conditions.
Small differences in returns can have a significant impact over time. As a rule of thumb, a 1% difference in annual return can translate into three to four years of additional portfolio longevity.
Many investors approaching retirement reduce their equity exposure in an attempt to be more conservative. While well-intentioned, this can have unintended consequences: if returns are too low, the portfolio may fail to keep pace with inflation and income withdrawals, leading to faster capital erosion.
During retirement, the goal is not merely to preserve capital, but to maintain purchasing power while meeting your income needs.
In this context, inflation should not be viewed solely through the lens of headline CPI.
While the national inflation target may be closer to 3%, retirees often face higher effective inflation due to expenses such as medical aid premiums, which may increase by 7-9% per year.
Inflation, therefore, is highly personal and should be assessed based on the actual cost structure of your household.
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Finally, the drawdown rate is a crucial variable.
Even a well-constructed portfolio earning 10-12% per annum can erode rapidly if the income drawdown is too high. The commonly cited 4-5% drawdown guideline is based on long-term return assumptions of 10-12% and incorporates an inflation buffer of approximately 5-7%.
Read: The hidden retirement risk: Drawing too much, too soon
Striking the right balance between drawdown rate and investment strategy is essential to ensure your retirement capital remains sustainable over time.
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