Stretching our retirement savings

How do we turn our life’s savings into a steady income? After “accumulating” funds in schemes like KiwiSaver for decades, drawing down on them after we pull back from working is called “decumulation”. How much money should we use at a time? Will we run out? Where should we keep our funds over such a long period? It takes some forward thinking and savvy decisions in order to make that money last for what can be 30 years or more in retirement.

Hatching the nest egg

New retirees literally have a “wealth” of options as they gain access to the funds they have built up over a lifetime. There are many choices to make on how to manage it, before we just blow it on a bach, boat or something else on the bucket list.

The stakes are high, since no one draws down their money more than once, or gets any practice runs before cracking open a nest egg. No pressure, but it will be hard to recover our funds or build them up again if anything goes wrong.

The other important thing to know is that people don’t typically spend consistently throughout retirement. There are three stages, and there are usually higher expenses early on (as we tick off the bucket list). Spending generally then falls during the middle stage before picking up later in life.

So studying our options, planning and getting quality advice become more important than ever.

Running some numbers

Sorted’s retirement planner can help give an idea of how long your money can last through the years. By setting your age to just before 65 and then inputting a certain amount of retirement savings, it shows how much steady income might be expected from a balanced fund.

This rough estimate is based on using up all your funds during your lifetime. You can also input different longevity numbers to get an alternate picture of how things could play out.

Try the Retirement planner

Rules of thumb

The retirement planner shows just one way to draw down our savings, using a rule of thumb called the “life expectancy rule”. This means we’re stretching our savings for as long as we estimate we’ll live. It’s not the only one, however.

The New Zealand Society of Actuaries has offered four rules of thumb that can help us make decisions on how to draw down our funds. These are good for different situations, so they can give us a broad steer . Here are the four:

  • Life Expectancy Rule: Each year, take out the current value of your savings divided by your average life expectancy at that time. This is for those who want as much income as possible during retirement and are not focused on leaving an inheritance.
  • The 6% Rule: Each year, take out 6% of the starting value of your savings. This is good for those who want to spend more at the start of retirement, when they are more active, and who are not focused on leaving an inheritance.
  • Inflated 4% Rule: Take 4% of the starting value of your savings, then increase that amount each year with inflation. This works well for people worried about running out of money, or those who want to leave a legacy.
  • Fixed Date Rule: Run down your savings to a set date. Each year, take out the current value of your savings divided by the number of years until that date. This is good for those who are okay with living off of NZ Super after their chosen date.

Here’s where to find more information on these rules of thumb. 

Where to keep our money? Think three buckets

During retirement, there are three challenges to overcome with the money we have:

  • Liquidity: For the short term (0–3 years), you need money to live on and cash on hand in case of an emergency.
  • Income: For the medium term (4–9 years), you need money invested that can spin off a regular income for when you’ll need it.
  • Inflation: For the long term (10 years plus), you need money invested that can keep up with inflation. Money loses its buying power over time, so in the long term it can’t be just stuffed under a mattress – by the time you’re ready to spend it, it will have lost much of its value.

The solution to these three challenges is to have your savings in three buckets:

  • The short-term one can hold cash.
  • The medium-term bucket can be filled with income-producing investments such as bonds.
  • The third long-term one can hold growth assets such as shares or property.

Spreading funds across all three buckets helps prepare for decades of retirement. It all comes down to when you will need to spend the money – and you can invest accordingly to match your needs.

You’ll need to review your situation each year and move money from long term to medium term, and from medium to short. This helps to make sure your savings will be there when you’ll need them.


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