Sailing into retirement?

Most of us will need to get more income out of our retirement savings than the old strategy of parking it in a term deposit and living off the interest it provides, especially in recent years, when interest rates have been low. Living off the profits of a business or the rent from a property is also not dependable over decades and puts all your eggs in just one basket, so it’s risky. 

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

Turns out that generating steady amounts to live on over long periods is challenging – especially from investment funds that swing up and down in value – both mathematically and even behaviourally. We don’t get any practice at it, there’s a lot at stake, and we don’t have the option to go back in time and grow that money all over again. There are uncertainties about how long we’ll live, how high prices will rise (inflation), how investment markets will do, and how much all of these will shape our lifestyle. 

This navigator is primarily for retirees and pre-retirees who are at most 10 years out from retirement. If your retirement is still a way off, you can project how much you might have in the future using our KiwiSaver calculator and Retirement calculator, then enter that figure into this tool.

This tool calculates how much income you can receive from a lump sum. (It includes NZ Super, but does not include other income streams you may have, such as business or rental income, a different pension or an annuity.)

Here are some sources you consider when you’re gathering as much as you can to invest for your long-term income in retirement:

• Your KiwiSaver

• Other savings or investments

• Freed-up equity from downsizing the family home or selling a property

• Proceeds from the sale of a business

• An inheritance.

This long-term money can be invested in a well-diversified, professionally managed fund that you can withdraw from regularly, such as a KiwiSaver fund. This tool defaults to displaying what could happen with a balanced fund, and also shows you how keeping your long-term money invested in a conservative or growth fund could shape your retirement.

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 having a spending approach comes in – it lets you monitor and adjust your spending as you go, giving you confidence over the long term.

If you’d like to make your invested savings last throughout your lifetime, the ‘life expectancy’ option may suit best. For this, you divide your invested savings by your estimated retirement span and set up regular withdrawals. This tool shows you how it could play out over the years.

Two things in particular, but you may have more. The first is around how retirees tend to spend: more in the earlier years, less in mid-retirement, and perhaps a bit more towards the end because of health costs. Generally, people’s rate of spending isn’t constant throughout their retirement, so approaches like the 6% or fixed date options, which see you spending more in the early years, may suit. 

The second thing to consider is your bucket list – if you have a number of things you’d like to enjoy ticking off when you’re able, having a higher income in early retirement can help you do just that.

It’s not difficult, and most fund providers make it possible for people to withdraw a regular income from their fund over many years. In the first instance, you need to sign a withdrawal form to organise automatic withdrawals (for KiwiSaver this will include a statutory declaration). Some retirees prefer to receive theirs on the day NZ Super pays out each fortnight; others prefer alternate fortnights, so there’s some income every week to have on hand.

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% and 4% rules of thumb, if markets do well, you can expect to be able to withdraw a given amount for longer. With the fixed date and life expectancy options, you can expect to withdraw higher amounts when markets do better. Our retirement navigator estimates and displays what these scenarios could look like.

See our guide on the four approaches to spending in retirement, based on the New Zealand Society of Actuaries’ work on these drawdown rules of thumb.

For an explainer on how this tool works, and the technical assumptions behind it, see this page.

The prices of goods and services 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 could be a period as long as 20-plus years, this is important to consider. Staying ahead of inflation is one of the reasons we keep our retirement money invested. For example, the 6% approach does not adjust for rising prices, whereas the 4% option does.

Adjusting your start date for spending your invested savings is an important lever you can pull to achieve a higher retirement income. Generally, the longer you wait to begin withdrawing, the more money you’ll have, but this is closely linked to your decision to retire. 

Whenever you decide to retire, you’ll be investing in specific market conditions and will probably not be able to time your drawdown – you’ll simply start spending when you’re ready. Because you’ll be investing over a decent period, though, it may not matter much. 

Even if markets are poor when you start, they shouldn’t be for long, and you’ll be able to bounce back. That said, there is a risk called ‘sequencing risk’ that we all run: poor market conditions early in retirement can negatively impact our lifestyle in the years that follow. Staying invested in a well-managed, diversified fund can help you ride out the turbulence.

One way is to separate your short- and long-term money into separate ‘buckets’, with anything you need for specific goals in the next three years held in a bank – potentially in 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.

One of your money buckets in retirement should be for emergencies. This financial safety net 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.

It’s important to know that any of the four approaches for retirement spending and the figures shown here are not personalised advice and are not meant to take the place of you talking to a professional financial adviser. 

That said, working out your approach here ahead of time can make for a more meaningful and informed conversation with an adviser when you do meet with them.