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.
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.
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.
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:
Here’s where to find more information on these rules of thumb.
During retirement, there are three challenges to overcome with the money we have:
The solution to these three challenges is to have your savings in three buckets:
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.