You’ve accumulated investments throughout your working life, but do you know how to go about spending them when you’re retired?
For many retirees, the question of how to make their money last can be a daunting one.
There can be a lot of variables: Not just market movements that can affect your investment balance and income, but uncertainty over how long you need to plan for.
Here are a few rules that could help your thinking, if you’re in this position.
The 4% rule
One of the well-known rules for the “decumulation” phase is the 4 percent rule. It came from US financial adviser Bill Bengen, who calculated it was a ‘safe’ amount for clients to take out of their portfolios each year without running out of money.
Using a simulation of 50 percent invested in stocks and 50 percent in bonds, and using asset class performance over rolling 30-year periods since 1926, he found withdrawing 3 percent a year would make an investment portfolio last 50 years even if someone retired during a bear market.
Calculating that was probably too long for most investors, he worked out a 4 percent withdrawal rate would last 30 years.
6% rule
The New Zealand Society of Actuaries has also produced “rules of thumb” offering some other options.
They suggested investors could be able to take out 6 percent of the starting value of their retirement fund each year.
This means the money won’t last as long but they said it would “front load” spending, which might not be a problem for retirees who often spend more in the early retirement years, anyway.
Inflated 4% rule
The actuaries also said it would work to increase the 4 percent withdrawal by the rate of inflation. Their modelling showed income was likely to last from 65 until 94, and could last until someone was older than 100, depending on returns.
They also offered other, non-percentage-based options, including a fixed date rule, in which retirees decided how many years they wanted their money to last, and each year took out the current value of the fund divided by the number of years until that date.
They suggested you could also do this based on the number of years you have until you reach the average life expectancy.
Why the rules matter
The rules not only help you work out how much you could withdraw each year, but they can allow you to determine how much you need to begin with.
If you assume you’ll use the 4 percent rule, for example, and you want $100,000 a year from this, you can divide $100,000 by 4 percent, meaning you’ll need $2.5 million when you retire.
Other things to think about
Your retirement income needs will depend a lot on your individual circumstances.
Do you own your house outright, are you still paying off a mortgage or are you renting?
Do you have big travel plans?
Do you have any healthcare needs you can anticipate?
Do you think you’ll live longer than the 30 years assumed in the 4 percent rule?
You may also have access to government pensions which may affect your calculations.
We’re here to help
Whether you are devising a strategy to help you build your investments, wondering about moving a pension from offshore to New Zealand or thinking about a process for drawing funds down, our team of financial advisers is here to help.
We can answer questions you have about bringing your pension to New Zealand, or managing your money once you have it here.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.