Who works when you retire?
As we work through the stages of life we all hope to reach the sunset years of retirement. When you get to look back with satisfaction at what you experienced, achieved, influenced, the people you met, your loves and family.
But just because you’ve retired doesn’t mean the cost of living disappears. Over your working life-time, you hopefully have put aside enough to also enjoy the golden years and for many, they are busier and more active than they have ever been - travel, sports, pursuits and socialising all available to them.
As we move out of the work-force what we have saved and invested takes on a new level of importance. The sense of security we attach to our wealth is greater as we no longer have the working opportunity to make up losses of any bad investments. So, preserving the capital value is vitally important.
This attitude is reflected in the common investment approach for many retirees to be very conservative. It is often a time of reducing growth assets of shares and property in favour of income assets of cash and bonds.
The $64,000 question (which is such a dated phrase these days – many folks have a credit card limit in excess of this!) has always been how much do you need to save to be able to retire?
The New Zealand Society of Actuaries Retirement Income Interest Group released a paper back in 2017 that provided four different approaches to drawing down on savings during retirement.
- 6% Rule. Each year take
6% of the starting value of your retirement savings.
So, if you start with $1,000,000 this suggests
spending $60,000 per year in retirement.
- Inflated 4% Rule. Each year
take 4% of your retirement savings but increase it
by the rate of inflation each year. With $1,000,000
you would take $40,000 in year one, and if inflation
is 1.5%, in year two you would take $40,600.
- Fixed Date Rule. Choose an end
date, say age 90, and divide your retirement nest
egg each year by the remaining years. In the first
year with savings of $1,000,000 and 25 years to age
90 would be $40,000. Year two would be your
retirement savings plus investment returns (say 1%)
divided by 24 would be $40,400.
- Life Expectancy Rule. Divide your retirement savings by your average remaining life expectancy. The amount you withdraw will vary each year. For example, at age 65 males are expected to live a further 19.5 years and females 21.5 years. If you make it to 75 as a male you have a life expectancy of a further 12 years and for females 13.5 years.
None of the above take into account contributions from National Superannuation. The closer you are to age 65 the more you can build in an expectation of receiving some form of government provided pension. However, the younger you are there are likely to be changes either to the benefit level, age of entitlement (currently 65), some form of means testing or actual retirement from work. A combination of all these factors could come in to play sometime in the future.
The other spanner in the works at this point in time,
is the low interest rate environment. Earnings on your
retirement nest egg while drawing down on it was
supposed to provide additional years of buffer to
With interest rates, at best 1% after tax for the year, the above options run out sooner than was ever anticipated. For example, under Option One (6% Rule) at 1% interest rates, the nest egg is depleted in around 18 years and under Option Two (Inflated 4%) the money is gone in around 24 years.
Low interest rates are having the same impact on retirement savings and retirees as high inflation was in the 1970s and 1980s. They are making retirement goals more difficult to achieve for those still working, and wrecking the retirement years of those at that stage.
For those still saving for retirement checking that your anticipated retirement nest egg will still meet your anticipated retirement income level is a worth-while exercise. Adjusting your savings contributions or reducing your expectations may be necessary.
If you are already retired you will already understand this. You are either becoming more reliant on National Superannuation or you are having to adjust your spending patterns. The third option is increasing the risk in your investment portfolio seeking higher returns but that may not be a comfortable adjustment to make.
Some folks are utilising reverse mortgages to provide additional cash although these come at a high cost with debt accumulating against your home. Others have become more reliant on family.
However you cope with it, having a plan and monitoring it will add a degree of comfort and understanding to your situation.