Which Investments Should You Draw From First in Retirement: ? A South African Withdrawal Strategy

Why Retirement Income Becomes a Sequencing Problem

Imagine two retirees who each spend R1 million a year and have exactly the same total wealth.

The first funds almost everything from a living annuity. The second receives the minimum required living-annuity income and meets the balance from discretionary investments. Their lifestyles may look identical. Their tax returns, future liquidity, capital structure and eventual estates may look very different.

That difference becomes important once retirement capital is no longer held in one neat pot.

At that point, the balance sheet usually contains capital doing several different jobs. Some money is there to fund the next few years. Some must support income for life. Some provides access to foreign currency or long-term global growth. Some may genuinely be intended for the next generation.

Good retirement planning should therefore separate the different capital pools rather than treating total net worth as one investment account.

This is also why the idea of a fixed “withdrawal order” is appealing but usually inadequate. A rule is easy to remember. Unfortunately, the balance sheet does not care that it is easy to remember.

The Same R1 Can Have a Different Tax Character

The first reason sequencing matters is tax.

South Africa does not tax every source of retirement spending in the same way. For the 2027 tax year, individual income tax remains progressive, with marginal rates ranging from 18% to 45%. Living-annuity income falls into taxable income, whereas the tax consequences of discretionary investments depend on what actually produced the cash: interest, dividends, a capital gain, or simply the return of capital as part of a disposal.

This creates an important distinction: the amount of cash you spend is not necessarily the amount on which you are taxed.

That sounds obvious once stated. It is nevertheless one of the reasons a retirement plan built only around a living-annuity drawdown percentage can miss a large part of the picture.

Why Simple Withdrawal Rules Fail

Several rules of thumb sound sensible in isolation.

“Always spend discretionary investments first”

The argument is that retirement capital grows in a tax-advantaged environment, so the living annuity should be preserved for as long as possible.

Sometimes that will be sensible. But not always.

The discretionary portfolio may contain large unrealised capital gains. It may be your most flexible emergency capital. It may be earmarked for a future property purchase or foreign-currency expense. And preserving a very large living annuity indefinitely can mean preserving a future source of taxable annuity income as well.

The question is not which wrapper has the best tax treatment in isolation. It is what happens to the whole plan when you spend one and preserve the other.

“Always keep the living-annuity drawdown as low as possible”

A low drawdown reduces pressure on the living annuity and can improve sustainability. That is important.

But the lowest possible drawdown is not automatically the best lifetime tax strategy. A retiree in a relatively low taxable-income year may sometimes have good reason to draw more retirement income while preserving another pool with a different future role.

The trade-off is real: capital withdrawn from a living annuity loses the benefit of remaining inside that retirement structure. You should therefore not increase the drawdown merely to save tax somewhere else without modelling the long-term consequence.

“Never touch the TFSA”

Preserving tax-free capital for as long as possible often has considerable value. The returns remain free from income tax, dividends tax and capital gains tax, and a withdrawal does not give you the right to replace that capital outside the normal contribution limits.

That makes a TFSA a high-bar asset to spend, not a sacred one.

If every alternative would require a particularly damaging sale, create an unnecessary tax event or leave the retiree without suitable liquidity, using some tax-free capital may still be entirely rational. The point is to understand what you are giving up.

A Better Withdrawal-Sequencing Framework

Rather than starting with an account order, start with the decisions the money needs to solve.

1. Work out what the household actually needs from investments

Begin with spending rather than products.

Separate essential spending from flexible or discretionary spending, then deduct income that will arrive regardless of the investment strategy: guaranteed annuity income, employment or consulting income, rental income, pensions and other reliable receipts.

What remains is the amount the investment balance sheet needs to provide.

2. Identify income you cannot avoid or freely change

A living annuity has a prescribed drawdown range. A life annuity produces contractual income. Interest and dividends may arise whether you spend them or reinvest them.

These cash flows form the starting layer of the income plan before deciding where the remaining spending should come from.

3. Map the tax character of every capital pool

For each investment, ask:

• Will taking money create ordinary taxable income?
• Is there an embedded capital gain?
• What is the cost base?
• Has the annual capital-gains exclusion already been used elsewhere?
• How much interest and dividend income is already expected?
• Does the investment sit inside a tax-free or policyholder structure?
• Who actually owns the asset?

This is where tax planning becomes less about finding a loophole and more about understanding the accounting character of each rand.

4. Protect sufficient liquidity

A mathematically tax-efficient sequence can still be a poor retirement strategy if it leaves the retiree short of accessible capital.

Known spending, large once-off expenses, healthcare contingencies and the ability to survive a difficult market period without selling unsuitable assets all need a liquidity plan.

There is no universal number of “years of cash” that is right for everyone. Holding more liquidity improves short-term resilience but normally reduces the amount of capital participating in higher expected long-term returns. That trade-off should be explicit.

5. Decide which capital is genuinely long term

Not every rand needs the same investment horizon.

Capital required for the next two years and capital likely to be left to children in twenty years should not automatically have the same investment role simply because both appear on the same statement.

This is where withdrawal sequencing and investment strategy meet. Spending should, where practical, be funded in a way that respects the intended role and time horizon of each portfolio rather than forcing whichever investment happens to be easiest to sell.

6. Consider what remains at death

Withdrawal sequencing gradually changes the composition of your estate.

If discretionary assets are spent while a living annuity is preserved, more wealth may ultimately remain inside the annuity’s beneficiary framework. If the living annuity is deliberately depleted while discretionary capital is retained, more of the remaining wealth may eventually sit in the deceased estate or in offshore structures requiring separate administration.

Neither outcome is inherently better. It depends on the intended beneficiaries, estate liquidity, ownership, nominations, wills, foreign assets and other structures.

Our estate planning guide deals with those issues in more detail.

7. Model more than one tax year

This is perhaps the most important step.

The objective should not be to pay the least possible tax in 2026/27. The objective is to fund the retirement plan efficiently over time.

A strategy that produces a very low tax bill today may leave a much larger taxable income stream later. Equally, deliberately creating tax now simply to avoid a hypothetical future tax bill can destroy valuable tax-sheltered compounding.

Withdrawal sequencing therefore works best when projected over several years, with different assumptions for spending, returns, inflation, portfolio values and future income sources.

Living Annuity or Discretionary Capital: A Simple Example

Consider a simplified hypothetical retiree, aged 68.

She has a R12 million living annuity alongside a substantial direct discretionary portfolio. She wants R900,000 of gross portfolio cash flow during the year, before allowing for her wider tax position.

Assume her living-annuity minimum income is 2.5% of the relevant value: R300,000.

Approach A: Draw the full R900,000 from the living annuity

The entire R900,000 is annuity income and forms part of taxable income. The discretionary portfolio remains untouched and continues to provide liquidity, flexibility and future estate capital.

Approach B: Draw R300,000 from the living annuity and sell R600,000 of discretionary investments

Now suppose the R600,000 of investments sold had a base cost of R480,000. The disposal therefore creates a R120,000 capital gain.

Assuming there are no other capital gains or losses for the year, the 2027 annual capital-gains exclusion of R50,000 reduces that to R70,000. For an individual, 40% of the remaining net capital gain is included in taxable income, so R28,000 enters the income-tax calculation.

In other words, the R600,000 transferred from the discretionary investment does not automatically create R600,000 of taxable income. In this deliberately simplified example, the withdrawal transactions create R300,000 of annuity income plus R28,000 of taxable capital gain — before taking account of any other income, interest, dividends, deductions or tax circumstances.

That does not prove that Approach B is better.

It has consumed R600,000 of highly flexible discretionary capital. It has changed the future estate. It has left more money inside the living annuity. The discretionary investment may also have generated taxable interest or dividends during the year whether or not it was sold.

The example proves only one thing: two strategies can deliver similar cash while producing very different tax and balance-sheet consequences.

That is precisely why the withdrawal source deserves to be modelled rather than assumed.

Where TFSAs, Offshore Investments and Endowments Fit

Tax-free investments: valuable optionality

The TFSA is unusually clean from a tax perspective. Returns and withdrawals are tax-free. From 1 March 2026 the annual contribution limit is R46,000 per person and the lifetime contribution limit remains R500,000.

The important sequencing issue is that withdrawing does not restore historic contribution room. If R300,000 is taken out of a mature TFSA, you cannot simply put R300,000 back the following month without the normal contribution limits applying.

For someone who already has ample liquidity elsewhere, that gives mature TFSA capital considerable long-term option value.

Offshore capital: tax is only one part of the answer

Direct offshore investments should not automatically be preserved forever simply because they are offshore, nor spent first because they are discretionary.

The relevant questions include why the offshore capital exists in the first place. Is it providing geographic diversification? Will there be future foreign-currency spending? Are there meaningful unrealised gains? Does the jurisdiction create estate or situs complications? Would repatriating the money undermine a deliberate long-term allocation?

For South African tax residents, foreign assets also remain part of the South African tax calculation in many circumstances. Our offshore investing guide and offshore wrapper guide cover the structural questions in more depth.

Endowments: do not ignore the access rules

An endowment or similar policy wrapper has a different tax and access regime from a direct unit-trust portfolio. That means it should not simply be labelled “discretionary” and treated as interchangeable with cash or a directly held investment.

Its value in the sequencing plan depends on the policy’s restriction period, tax treatment, beneficiary arrangements, investment role and what other liquid capital is available.

Our article on endowments and sinking funds explains the wrapper itself in detail.

Liquidity and Sequence Risk Matter Too

Tax optimisation receives most of the attention because it is easy to measure. Investment risk can be less visible but more consequential.

If a retiree needs R1 million during a year in which a growth portfolio has fallen sharply, selling R1 million of that portfolio permanently removes units that would otherwise participate in a recovery.

That is sequence-of-returns risk in practical form.

A well-designed withdrawal strategy therefore considers where the next period of spending will come from before the market falls, not after.

Cash, income-producing assets, planned living-annuity withdrawals and other near-term liquidity can all help reduce the need to sell long-horizon growth assets at an inconvenient time. But this should not become a justification for moving the entire portfolio into low-return assets. Retirement can last decades, and growth still has a job to do.

The objective is not to eliminate volatility. It is to avoid making near-term spending unnecessarily dependent on the timing of that volatility.

Think at Household and Estate Level

Withdrawal sequencing becomes more complicated again for couples.

A living annuity belongs to a particular annuitant and its income is taxed accordingly. Direct investment income and capital gains depend on ownership and the couple’s matrimonial property regime. For spouses married in community of property, SARS has specific rules for splitting certain investment income and capital gains.

That means a household should not simply combine both spouses’ assets on a spreadsheet and assume a rand of taxable income can be assigned to whichever spouse has the lower rate.

The legal ownership matters.

So does survivorship. A withdrawal plan that works efficiently while two spouses are alive may need to change materially after the first death, particularly where annuity income, asset ownership, expenditure and beneficiary structures change.

For wealthier households, this is where retirement-income planning, tax planning and estate planning stop being separate exercises. They are different views of the same balance sheet.

The Best Sequence Is Usually a Multi-Year Decision

The right withdrawal source can change.

In one year, substantial discretionary capital may be needed for a property purchase. In another, markets may be down and cash reserves may become more valuable. A large capital gain elsewhere may make discretionary realisations less attractive. A spouse may retire, reducing employment income. A guaranteed annuity may begin. Offshore spending may increase. Healthcare costs may change the amount of liquidity required.

The sequence should respond to these changes.

That does not mean reinventing the plan every January. It means setting a deliberate framework and then revisiting the variables that matter.

This is the larger point: retirement-income planning is not an annual tax exercise attached to a portfolio. It is an ongoing capital-allocation decision.

Once you have several sources of capital available, the plan needs to decide not only what each portfolio should own, but what job each portfolio should do.