Retirement income planning has long been framed as a question of returns. What investment strategy should you follow? How much risk should you take? Which funds should you select?
But this way of thinking misses a far more important question, one that sits at the heart of whether a retirement plan succeeds or fails: what return do you need for your income to last? This is one of the central ideas explored in the Reimagining retirement whitepaper, which challenges longheld assumptions about how retirement income strategies are constructed.
In retirement, the income you choose sets the path for everything that follows. The higher the income you draw, the higher the return you will need to sustain it over time. This relationship is often overlooked. Many retirees focus on what income they want, without fully appreciating what that income demands from the market.
For this reason, the retirement income rule of thumb has long served as a practical guide. It suggests that a starting income of around around 4% to 5% of your capital, adjusted for inflation, provides a reasonable chance of sustaining income over a 25- to 30-year retirement.
What sits behind this rule is an important principle: it is not just about how much you draw, but about setting an income level that keeps the required return within a realistic range. Yet, in practice the numbers tell a different story. A significant proportion of retirees draw closer to 7%, with many going even higher. At first glance, this may seem like a small deviation. But the implications are anything but small, as the relationship between drawdown and return is not a one-to-one relationship.
As illustrated in the Reimagining retirement whitepaper, under the assumption that your income increases by 5% each year, selecting a 5% starting drawdown requires a return of around 8.2% net of fees to sustain income over time. Increase the starting drawdown to 7%, and the required return rises to approximately 11.2% net of fees or closer to 12% or 12.5% gross of fees.
A 2% increase in income requires a 3% increase in return. That shift moves a retirement strategy from a range that is broadly achievable over time to one that depends on consistently strong market performance for decades. It also leaves very little room for error. The reality is that most retirement plans do not fail because of poor returns. They fail because the returns required were unrealistic from the start, or because returns were poor early on in retirement. This is what is called sequence risk.
If returns are lower than expected in the early years of retirement, the combination of withdrawals and underperformance can permanently damage a portfolio. Even if markets recover later, the capital base may already be too depleted to sustain income over the full retirement horizon. In other words, retirement does not usually fail in year 25. It begins to fail much earlier, when drawdowns and required returns fall out of balance. If the real problem is an unachievable required return, then the solution is not necessarily to chase higher returns, it may be to reduce the return you need.
One way to do this is to draw a lower level of income. An alternative approach is to reduce reliance on the market. A hybrid annuity structure (a living annuity with a guaranteed component) combines market-linked investments with a guaranteed income stream. By allocating a portion of retirement savings to our Guaranteed Annuity Portfolio, part of the income is secured for life. This can reduce the amount that needs to be funded by market-linked assets, and the effect can be significant. As shown in the whitepaper, this can reduce the required return from the market-linked assets from above 11% to a level closer to 8% or 9%*, which is far more achievable over time.
Yet, if this strategy can improve your income sustainability, the question is at what cost? A common concern is that introducing guaranteed income reduces flexibility or compromises inheritance. However, the relationship is more nuanced. By easing the pressure on the market-linked portion of the portfolio, capital can be preserved more effectively in the long term, especially when markets underperform. In many scenarios, this increases the likelihood of maintaining income while still leaving a meaningful inheritance, rather than depleting the capital entirely. The key insight from this research is simple but powerful: retirement success is not only defined by the return you achieve, but by the return you require.
Once this is understood, the conversation shifts. Instead of just asking how to generate higher returns, the new question becomes how to build a structure that reduces the return you need. This shift from return chasing to risk management has the potential to fundamentally improve retirement outcomes. In a world where uncertainty is the only constant, you can implement a different strategy – one that requires less from markets, not more.
Click here to download the full Reimagining retirement whitepaper
