Retirement spending rules: 4 expert approaches to make your money last

How to make sure your retirement money lasts

The obvious goal with retirement spending is to stretch your money and not have it run out before you want it to. What often gets overlooked is that, just as importantly, you don’t want to end up overly anxious about your spending either, leaving your best years not as good as they could be.

Above what you’ll receive from NZ Super – which helps to protect you from running out of money – one way to navigate retirement is to keep most of your savings invested in a single fund (such as a KiwiSaver fund) and set up regular withdrawals. But how much can you comfortably spend? That’s where the four approaches come in.

Keep your retirement span in mind

How long are we talking? When you start spending makes a huge difference, so delaying your retirement date is one lever you can pull to increase your income once you do retire from paid work.

In terms of how long retirement might be, many of us underestimate based on our parents’ experiences and overlook that average longevity in New Zealand keeps increasing. Our personal longevity estimate will change over time, too; the older we get, the longer we’re expected to live – so your lifespan at 75 will be longer than what you expect it to be when you’re 65. Our retirement navigator helps you estimate yours.

Keep your span in mind as you compare this number with your approach to spending. Will your money last as long as you’ll need it to? Will it be enough to fund your lifestyle?

Which retirement money are you spending – short term or long?

The idea here is to have your long-term money – the lump sum you intend to live on – invested in a managed fund while you gradually draw down from it. This way, thanks to compounding interest, it will potentially keep growing as you spend it and last longer as a result.

Now, any short-term money you have – emergency funds or money intended for specific goals, such as helping family, holidays, or a new car or roof – will need to be set aside. That means when weighing up the four spending options below, it’s important to keep in mind that they don’t relate to your short-term money – just the lump sum you’ll invest for the long term and withdraw from regularly as income.

The four approaches

For each of the following four practical options, the amount you spend or the length of time your money lasts will vary depending on investment markets and inflation. Having a planned approach lets you monitor and adjust your spending as you go, giving you confidence over the long term.

To set one of these in motion, you can calculate how much you’d like to spend each week, fortnight or month using our retirement navigator. Then contact your fund provider directly to set up your regular withdrawals to be paid into your bank account on the day and at the frequency you prefer. Some people prefer to have their withdrawals arrive on the same day as their NZ Super, or on alternating fortnights instead, so there’s money coming in every week.

Option 1: Spend 6% of your starting balance each year

If you’d like to spend more when you’re more active early on in retirement, the 6% approach could be for you. You calculate 6% of the starting value of your fund in the first year and set up regular withdrawals of that constant amount for the years to come.

How this option plays out

When investment markets change, it will affect how long you can withdraw 6%. If they do better, you’ll have more money available to withdraw for a longer period.
Inflation causes prices to increase over time. Because you’re withdrawing steady amounts over many years, inflation will see your money’s buying power decrease.
The type of fund you’re in – conservative, balanced or growth – will determine your fund’s ups and downs in value, and directly affect how long your money will last.

The benefits and drawbacks of spending 6%

Benefits:

This is the simplest approach to understand and set up.
It features predictable, regular income, although how long it will last will depend on investment returns. This makes it easy to budget and plan ahead.
It’s good for those who want to have a higher income earlier in retirement, which can be an advantage if you’re actively enjoying your hobbies or travelling the world.

Drawbacks:

Your income doesn’t adjust for rising prices, so your buying power weakens as the years go by. This could prove stressful.
You run a higher risk of your money running out later in retirement, especially if markets do poorly or you live longer.
This option is less likely to allow you to be able to leave behind an inheritance or donation to a cause you support.

Option 2: Spend 4% the first year, then increase for inflation

If you’d like to stretch your money for as long as possible and leave an inheritance, the 4% approach might be just the thing. In the first year, you calculate 4% of the starting amount of your invested savings and set up regular withdrawals. Then you increase your withdrawal amount each year to cover inflation (2%). This gives you a steady income throughout retirement.

How this option plays out

When investment markets change, it will affect the amount of money in your fund and therefore how long you can withdraw 4%.
Inflation causes prices to increase over time. Because you’re withdrawing regular amounts over many years and adjusting for inflation, you should be able to keep pace with rising prices in years to come.
The type of fund you’re in – conservative, balanced or growth – will determine your fund’s ups and downs in value, and directly affect how long your money will last.

The benefits and drawbacks of spending 4% and adjusting for inflation

Benefits:

You get lifelong income: your money will likely last throughout your retirement.
Your income adjusts upwards to cover rising prices (inflation), so your money’s buying power stays steady.
You’ll probably be able to leave a legacy, such as an inheritance to family or a donation to your favourite cause.

Drawbacks:

The 4% approach gives you a lower income than other options, especially in the early years.
Since this is a frugal approach, you may end up not spending as much as you could and miss out on opportunities, especially if markets do well.
Having to adjust for inflation makes this approach a bit more complex.
Although your income stays steady with this approach, it doesn’t necessarily adapt to your changing spending patterns through the years.

Option 3: Spend your invested savings up to a fixed date

If you plan to live on NZ Super alone or another source of income after a specific age, the fixed date approach could be right for you. Each year, you divide your invested savings by the number of years you want them to last. Then you set up regular withdrawals based on that figure for the coming year.

How this option plays out

When investment markets change, it will affect the amount of money in your fund and therefore how much you can withdraw in a given year.
If you recalculate and change the length of time you want your money to last, it will influence the income you can withdraw.
The type of fund you’re in – conservative, balanced or growth – will determine your fund’s ups and downs in value, and directly affect how much you can withdraw in any given year.

The benefits and drawbacks of spending down to a fixed date

Benefits:

Higher income. This option gives you more money to play with, especially in the early years of retirement.
How long your income will last is known and predictable.
You’ll fully use all your funds in the time period you choose.
This option is good for those who want to spend more early in retirement and are comfortable tapping into the equity in their property or living on NZ Super after a specific age.

Drawbacks:

Your income will vary, depending on how investment markets perform. You won’t have a constant amount coming in and will have to adapt accordingly.
This approach doesn’t cover you against rising prices (inflation).
It’s not for leaving an inheritance for family or a cause you support.
Your income will need recalculating every year.

Option 4: Spend in line with your life expectancy

If you’d like to make your invested savings last throughout your lifetime, the life expectancy approach may suit best. For this, you divide your invested savings by your estimated retirement span and set up regular withdrawals. Since your estimated lifespan typically gets longer as you age, you’ll need to recalculate every year or two.

How this option plays out

When investment markets change, it will affect the amount of money in your fund and therefore how much you can withdraw in a given year.
The dynamic calculations ensure you optimise your income throughout retirement and don’t outlive your savings.
The type of fund you’re in – conservative, balanced or growth – will determine your fund’s ups and downs in value, and directly affect how much you can withdraw in any given year.

The benefits and drawbacks of spending in line with your expected retirement span

Benefits:

This approach efficiently makes the most of your invested savings and maximises your income throughout your entire life.
You can typically withdraw more early on in retirement than with other fixed-dollar approaches.
This is the most flexible option, as it adapts to changing markets and your shifting retirement span (which gets longer as you age).

Drawbacks:

Your income will vary, depending on how investment markets perform, and reduce significantly towards the end of retirement. This means your budget needs to adapt, too.
This option makes the most efficient use of your money in your lifetime, so it’s not for you if you want to leave an inheritance or a donation.
Your income will need recalculating every year.
This approach is relatively complicated. You may need some professional support to make it happen.

Retirement spending FAQs

Do I really need to invest?

Most of us need to get more income out of our savings than the old strategy of parking it in a term deposit and living off the interest, especially in recent years, when interest rates have been low. Living off the profits of a business or the rent from a property is typically not dependable over decades, either.

The solution is a well-diversified, professionally managed fund that you can withdraw regularly from, such as KiwiSaver. Our retirement navigator defaults to a balanced fund, but also shows you how keeping your long-term money invested in a conservative or growth fund could shape your retirement.

How do I pick a fund to regularly withdraw from?

If you’re shopping around for an investment fund to use for income in retirement, essentially you want to pick a managed fund (KiwiSaver or non-KiwiSaver) that:

Is the right type for your situation. Our Smart Investor platform can help you start with balanced funds. If you’re looking for a more conservative or growth fund, we can help you there too. Finding your type is a way of setting how much risk you’re taking on, so you want to make sure you’re comfortable and it’s right for you.
Has fees that are reasonable. You can easily sort through funds of your type by their cost, which is what you pay a professional fund manager to invest your money. The more fees we pay, the less money we receive in the end – and fees can add up to tens of thousands of dollars over the years, so it helps to compare costs well. You may decide that higher fees are worth it, but it literally pays to choose carefully.
Comes with good service and communication from the fund provider. Most fund managers are set up to let you withdraw regularly in retirement, but it doesn’t hurt to ask how it all works. The way they communicate with you says a lot.
Hasn’t performed below average. When you’re looking at how well a fund has done in the past, remember that the future won’t be the same and we can’t know how it will do. But if a fund has consistently underperformed its peers, it can be a sign that it hasn’t been managed very well.

Here’s our guide to investment funds generally. Good advice is gold, so here’s our guide to finding a financial adviser to support you, too.

I’m going to need more income – are there ways I can increase it?

Working out how much income you’ll get from a pot of money can be underwhelming. If the figures you’re seeing from these spending approaches aren’t going to be enough to live on, know that you do have some levers to pull. You can:

Increase your invested savings. In the pre-retirement years, you can funnel more money towards KiwiSaver. In retirement, you may find you have more options of selling assets or downsizing and freeing up equity that can pad out your retirement fund.
Delay retiring. Continuing to earn for a year or three can make a meaningful difference before you eventually retire, allowing you to invest more and withdraw over fewer years. Our retirement navigator lets you see just how much.
Spend more earlier, live off NZ Super later on. Approaches such as the 6% or fixed date rules of thumb can ‘front-load’ your retirement and give you more money during those years when you will typically be more active and ticking off your bucket list.
Take on more investment risk in a growth fund. Many retirement calculations are based on a conservative or balanced investment mix, but you could change to a growth mix to see what difference it could make. There’s no guarantee of a better income, but if investment performance is good and markets do well, you could benefit. You’d need a higher tolerance for risk, however, since there’s more of a chance you could suffer a loss.

Our investor profiler can help you gauge your risk and learn what to expect in terms of volatility and returns. Getting financial advice can make a big difference here; a financial adviser can help while you find ways to increase your income in retirement.

How do investment markets affect my retirement spending?

They will either impact how much you can withdraw or how long you can withdraw for, depending on your spending approach. For example, with the 6% or 4% rules of thumb, if markets do well, you can expect to be able to withdraw that amount for longer. With the fixed date or life expectancy options, you can expect to withdraw larger amounts when markets do better. Our retirement navigator estimates and displays what these scenarios could look like.

Can I withdraw more money if my investments perform well?

If you’re using the fixed date or life expectancy approaches, yes. Higher investment returns will allow you to spend larger amounts each year.

If you’re using the 6% or 4% options, better investment returns will mean that you can withdraw that 6% or 4% for longer – many more years, in some cases.

Some of this will depend on when your investments do well, such as at the beginning, in the middle or in late retirement. The earlier, the better.

What are the tax implications of withdrawing money from my retirement fund?

There aren’t any, really – taxes on withdrawing, that is. In a typical PIE (portfolio investment entity, and most KiwiSaver funds are PIEs), we all contribute post-tax dollars and our investments are taxed as they grow. We’re not taxed when we withdraw.

How does inflation impact my retirement withdrawals?

It’s easy to notice how prices tend to rise over time, which means that if we withdraw the same dollar amount each week or month, over long periods it will typically buy less and less. Some estimates point out that our buying power can halve every 17 years or so, so when you’re planning for retirement, which for many of us will be longer than 17 years, this is important to plan for. It’s one of the reasons we keep our retirement money invested.

For instance, although the 6% approach doesn’t adjust for rising prices, the 4% option does, increasing each year in line with inflation.

How do I know how long a retirement to plan for?

To make this easier, Sorted’s retirement navigator offers three options to choose from based on Stats NZ data. You can plan for an average, shorter or longer retirement span and then see how your savings would play out in all three, if you like. You might consider your family history and your general health, but you can always plan for a bit longer to be prepared (and in case biotech breakthroughs help us all extend our lifetimes!).

How do I set up regular withdrawals from my fund?

It’s not hard, and fund providers are generally set up so you can withdraw a regular income from your fund over many years. In the first instance, you need to sign a statutory declaration, then after that you can set up automatic withdrawals so the money hits your account when you need it. Some people prefer to receive it on the same day that NZ Super pays out each fortnight; others prefer alternate fortnights so there’s some income every week to have on hand.

How do I decide which of the four spending approaches is best for me?

We’ve built Sorted’s retirement navigator to take in your preferences and show you the option that best suits as a result. The tool then shows you how much you might have using that approach and how long it could last, depending on how much invested savings you have.

It’s important to know that any of these four approaches are not personalised advice and are not meant to take the place of a professional financial adviser. That said, working out your approach ahead of time can make for a more meaningful and informed conversation with an adviser when you do meet with them.

How can I use the retirement navigator to plan my spending?

The tool gathers your preferences, finds the best spending approach for you and estimates how much you can withdraw each year (or week, fortnight or month). This allows you to set up regular withdrawals with your fund provider.

For approaches such as the fixed date and life expectancy options that need recalculating every year or two, the tool takes your latest invested savings amount and reworks your figures to suggest how much you can withdraw.

How often should I review this?

Changes will happen! Investment returns will be up and down, you may have health or lifestyle changes, and unexpected expenses can pop up. It’s good to confirm that your spending approach is still working for you.

We recommend looking at it every year, if you can (especially for more hands-on approaches like the fixed date or life expectancy options), or at least every other year.

Having a financial adviser to check in with can certainly help – they’ll know what to look out for as you move forward.

Can I change my spending approach later on?

Yes – you don’t need to lock yourself in to one spending option for all of retirement. Feel free to change and adapt as you go, taking into account all the variables that retired life brings.

Setting your approach may be better later in retirement when your spending patterns are more reduced and consistent.

Can I change my withdrawal amount if my financial situation changes?

These approaches are flexible. You can reduce your withdrawal amount if you don’t need the money just yet, or increase it (although, as a result of increasing, your funds may end up not lasting as long). You can use our retirement navigator to rework your figures as you go, too.

How do I balance my short-term and long-term financial needs in retirement?

One way is to separate your short- and long-term money into separate ‘buckets’. Fill one set of buckets with money for anything you need for specific goals in the next three years and hold them in a bank, potentially in the form of a series of term deposits that wind up their terms in a staggered way over time. Your long-term money can instead be invested in a managed fund and drawn down gradually using one of the above approaches.

How do I plan for unexpected expenses in retirement?

One of your money buckets in retirement should be for emergencies. This should be kept in a bank account that’s separate yet accessible if needed at short notice. It needs to be held outside of the long-term investment fund you’re drawing down for income, which will be invested differently.

What should I do if I have specific financial goals, like helping family or taking a holiday?

Money for these goals can be kept in a separate bank account, or invested in a separate fund if it’s more for the medium (four to nine years) or long term (10-plus years). This money should also be held outside of the long-term investment fund you’re using for income in your retirement.

How can I ensure my retirement savings last throughout my lifetime?

Use the life expectancy approach to make sure that you stretch your money no matter how long you live. Essentially, this recalculates your income each year in line with your changing life expectancy (which lengthens as we get older), relying on statistics from Stats NZ. Your income should never run out, although it will dwindle in your later years.