Investment returns are one of the most underestimated factors in whether a retirement plan holds up. Most people focus on how much they have saved, which matters — but the rate of return that capital earns, year after year, is often what separates income that lasts from income that runs short.
The effect is easy to miss, because returns compound quietly. A difference of just two percentage points a year, sustained across a long retirement, can change the size of your remaining capital dramatically. This article looks at why retirement returns matter so much, how small differences add up, the risks involved in reaching for higher returns, and why the better starting point is working out the return you actually need — rather than chasing the highest one on offer.
Key Definitions
Real Return
Your investment return after inflation. It is the return that actually grows your purchasing power — a 9% return when inflation is 6% is a real return of roughly 3%.
Drawdown Rate
The percentage of your capital you withdraw each year for income. For living annuities, the FSCA permits a range of 2.5% to 17.5% per year.
Sequence-of-Returns Risk
The risk that poor returns early in retirement do lasting damage, because you are drawing an income at the same time as the market falls — leaving less capital to recover when markets turn.
Why Investment Returns Matter in Retirement
Your investment return determines how quickly your capital grows and how long it lasts once you start drawing on it. Earn too little, and your savings fail to keep pace with inflation and your withdrawals. Reach too far for high returns, and a poorly timed loss can do damage you never fully recover from. Both ends of that spectrum carry real consequences.
The clearest way to see the impact is to compare two retirees with identical capital and identical income needs, where the only difference is the return they earn. Consider someone starting retirement with R10 million, drawing R600,000 a year (rising with inflation), with returns shown in real terms — that is, after inflation.
| Years into retirement | Capital at CPI + 2% real return | Capital at CPI + 4% real return |
|---|---|---|
| Start | R10.0m | R10.0m |
| After 10 years | ~R5.6m | ~R7.6m |
| After 20 years | ~R0.3m | ~R4.0m |
Illustrative only. Assumes R10m starting capital, R600,000 annual income rising with inflation, and constant real returns. Actual outcomes vary with markets, drawdown, and timing.
The two retirees start in exactly the same place. Twenty years in, one is almost out of capital while the other still holds R4 million. Nothing about their spending differs — only the return. That gap is the quiet power of compounding, working for you or against you over a retirement that can easily run 25 to 30 years.
Start With the Return You Actually Need
Here is where our thinking differs from the usual approach. Most conversations about returns start with the question “how much can I earn?” We think the better question is “how much do I need to earn?”
The two are not the same. Chasing the highest available return means taking on more risk than your plan may require — and risk you do not need is risk you should not carry. So we work in the other direction. We start with the life you want in retirement, convert those aspirations into actual numbers, and weigh them against the capital you have. From there, we can calculate the return your plan genuinely depends on.
Once that required return is on the table, the conversation about risk becomes grounded rather than abstract. If your plan works comfortably at a real return of CPI + 3%, there is little reason to build a portfolio aiming for CPI + 6% and stomach the volatility that comes with it. If, on the other hand, your numbers only work at a higher return, that is important to know early — while there is still time to adjust your savings, your spending expectations, or your timeline. The required return is the anchor. Everything else follows from it.
The Risks Behind the Return
Reaching for higher returns means accepting more risk, and risk in retirement is more than just market volatility. Three forms deserve particular attention.
Liquidity risk is the difficulty of turning an asset into cash without taking a loss. Some higher-returning investments — property, private equity, certain hedge funds — are not easily sold, and retirement products such as living and life annuities limit how much you can access beyond regulated drawdown. If you need capital for a large expense, you will rely on discretionary investments outside those structures, so keeping enough liquid capital available matters.
Capital adequacy risk is the danger of simply not having enough invested to sustain your income. Even a well-built portfolio can be drained if you withdraw too much too soon, which is why a sustainable drawdown rate is one of the most important decisions a retiree makes.
Inflation risk erodes purchasing power over time. If your returns do not outpace inflation, your money buys less each year — a particular threat for anyone relying on income that does not escalate. Holding growth assets such as equities is part of how a portfolio defends against it. We have written more on the different types of investment risk and why volatility isn’t the only one that counts.
Why Timing Matters: Sequence-of-Returns Risk
Of all the risks a retiree faces, sequence-of-returns risk is the one most often overlooked — and one of the most damaging.
The idea is simple. Two retirees can earn the same average return over their retirement and end up in very different places, purely because of when the good and bad years fall. A market fall in the first few years of retirement, while you are also drawing an income, forces you to sell more units to fund the same withdrawal, leaving less capital to recover when markets turn. The same fall fifteen years later, against a larger base and fewer remaining years, does far less harm.
This is why the early years of retirement deserve particular care. It shapes both how a portfolio should be positioned as you transition into drawdown, and why a cash buffer — enough income set aside to avoid selling growth assets into a falling market — can be worth far more than its modest drag on returns.
Finding the Right Balance
Successful retirement investing is about matching the return you need with a level of risk you can live with — practically and emotionally. In our experience, that comes down to three questions held together:
- The risk you need to take — the return your plan actually depends on.
- The risk you are comfortable taking — your genuine tolerance for seeing values fall, not the answer on a questionnaire.
- The risk you can afford to take — the capacity your capital and timeline give you to absorb a setback.
Risk is not something to be eliminated; it is something to be matched to purpose. When the three line up, you hold neither too little growth to sustain your income nor more volatility than your plan requires. Where they conflict — say, you need a high return but cannot stomach the volatility to reach it — that tension is itself the most useful thing to surface, because it points to the real decision: save more, spend less, work a little longer, or accept a different risk profile. For most retirees, the practical answer plays out in how a living annuity portfolio is constructed and drawn down.
Frequently Asked Questions
What investment return do I need for a comfortable retirement?
There is no single figure — it depends on your capital, your income needs, and how long the money must last. Rather than aiming for a generic target, we calculate the specific real return your plan requires, then build a portfolio matched to it. Knowing that number is what makes the risk conversation meaningful.
What is a safe drawdown rate in retirement?
As a general guide, a drawdown of 4–5% of capital is considered conservative and sustainable, 6–7% is risky and needs monitoring, and 8% or more is aggressive and carries real risk of depleting capital. For living annuities, the FSCA permits 2.5% to 17.5%, but the regulated maximum is far from a safe one.
Why does the sequence of returns matter so much?
Because you are withdrawing income while invested. A poor run of returns in the first few years of retirement forces you to sell more to fund the same income, leaving less capital to recover. The same poor run later in retirement does far less damage. Timing, not just average return, shapes the outcome.
Is a higher investment return always better?
Not necessarily. Higher returns require more risk, and risk you do not need is risk worth avoiding. If your plan works comfortably at a lower return, chasing a higher one simply adds volatility without improving your security. The goal is the return your plan needs, not the highest one available.
How much difference does a 2% higher return really make?
A great deal, over time. Sustained across a 20 to 30 year retirement, a two-percentage-point difference in annual return can be the difference between capital that comfortably outlasts you and capital that runs short — even with identical savings and spending. Compounding magnifies small differences into large ones.
The Bottom Line
Investment returns matter more to a retirement plan than most people realise, and even a modest difference compounds into a large one over a long retirement. But the lesson is not “chase the highest return you can find.” Higher returns demand more risk, and the risks that matter in retirement — liquidity, capital adequacy, inflation, and the timing of those returns — all deserve as much attention as the headline number.
The more useful approach is to start from the other end: work out the return your plan actually needs, then take only as much risk as that requires. It is a calmer, more deliberate way to invest, and it tends to produce better decisions — and better nights’ sleep — than reaching for performance for its own sake.
If you are not sure what return your retirement actually depends on, that is exactly the kind of thing worth modelling properly. As a fee-only, flat-fee firm, we have no product to sell you off the back of the answer — just the numbers and what they mean for you.
If you’re not sure what return your retirement plan actually depends on, we can model it for you — and show you the level of risk that comes with reaching it, so the trade-off is clear before you decide anything. Find out more here on the types of retiree clients we usually work with.
This article is for informational purposes only and does not constitute financial advice. Henceforward (Pty) Limited is an authorised representative of Graviton Wealth Management (FSP 8772). References to market events and historical performance are for illustrative purposes only and are not indicative of future results. Projections and illustrations are for discussion purposes only. Consult a qualified financial advisor before making any investment decisions.
Steven has been in the financial services industry since 2003 and launched Henceforward with Carl-Peter Lehmann in 2021. He focuses primarily on financial planning and client relationships. Henceforward is a fee-only, flat-fee firm — no commissions, no product incentives.