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STUFF
There is not a lot of information available for New Zealanders, the actuaries said.
You’ve got to retirement, with a decent chunk of money in the bank or your KiwiSaver account.
How do you make it last?
The NZ Society of Actuaries produces research about the “rules of thumb” that people can use to work out how much they might be safe to spend each year.
Here are their options, and how they work.
6% rule
How it works: Each year, you take out 6% of the starting value of your retirement fund. If you had $100,000 at the beginning, that would mean $6000 a year.
This suits people who want more income at the start of their retirement and frontload their spending, not worried about leaving money for an inheritance. It gives regular income but will not increase with inflation and there is a risk of it running out within a person’s lifetime.
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Someone with $100,000 at 65 would find it ran out by age 94.
Inflated 4% rule
How it works: You take out 4% of the starting value of your retirement fund, then increase that amount in line with inflation. This works better for people who want to leave something behind, or who are worried about running out.
The actuaries said this was likely to make the money last nearly a person’s whole lifetime but would offer lower income.
Modelling showed income would probably last to 103.
Fixed date rule
How it works: You decide to run your retirement fund down out to a set date, and each year take out the current value of the fund divided by the number of years left until that date. This works if you’re happy to live on the pension if you outlive the date you’ve chosen.
It requires an annual calculation to determine how much you can spend.
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If you decided you were going to do this with $100,000 over 25 years, you would get $4000 in the first year and that could grow to $8000, the actuaries said. But there was some uncertainty due to variation in investment returns.
Life expectancy rule
How it works: You take out the current value of your fund divided by the number of years you have until you reach the average life expectancy.
This works if you’re wanting to maximise your income throughout your life and are not worried about offering anyone an inheritance. It can mean you don’t get a lot in your later years and there’s a risk your outlive your money if you live longer than the average.
The actuaries said the surest way to have more money in retirement was to start drawing it down at a later stage.
Increasing the proportion of growth assets you have in your investment fund should also lead to higher returns, which allows more income to be generated, they said.
“But it also increases uncertainty and the potential for less income to be available. It is important that retirees do not ‘set and forget’ their drawdown plan. Plans should be reviewed regularly, especially if investment conditions change.”
Actuary Alison O’Connell said it was not a case of having to choose the right strategy for a person’s whole retirement.
”We are trying to help people understand how much income they could take and what the implications of that would be.”
People could try one strategy for a year and then change it, she said.
“Things are never set in stone, they can change with investment conditions and people’s own preferences.”
She said there was not a lot of information available to New Zealanders about how to make their money last, and the society’s intention was to change that.
“It is pretty daunting, there are a lot of different choices to make. We are trying to set up a framework, thinking about all the different issues.”
Many people found they needed less money than they initially expected in retirement, she said, and the amount they needed to spend could reduce as they became older.
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