It’s hard to know how much money we will need in our retirement and it’s even harder to know if we have saved enough. So it’s important to have some forward thinking and to make some 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. But the important thing to remember is that people don’t typically spend consistently throughout retirement. There are three main stages to retirement.
Early stage – usually higher expenses early on as we tick off the bucket list
Middle stage – spending generally falls during the middle stages of retirement
Later stage – spending usually picks up again in later life
So it’s important to plan and get quality advice throughout your retirement journey.
Running some numbers
There are lots of retirement planner calculators available that use the “life expectancy rule” and can give you an idea of how long your money can last through the years. 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 and can give us a broad steer .
- Life Expectancy Rule: Each year, take out the current value of your savings divided by your average life expectancy at that time. This is for those who want as much income as possible during retirement and are not focused on leaving an inheritance.
- The 6% Rule: Each year, take out 6% of the starting value of your savings. This is good for those who want to spend more at the start of retirement, when they are more active, and who are not focused on leaving an inheritance.
- Inflated 4% Rule: Take 4% of the starting value of your savings, then increase that amount each year with inflation. This works well for people worried about running out of money, or those who want to leave a legacy.
- Fixed Date Rule: Run down your savings to a set date. Each year, take out the current value of your savings divided by the number of years until that date. This is good for those who are okay with living off of NZ Super after their chosen date.
Planning for the 3 stages of retirement can be challenging but if you have your savings in three buckets then it can help spread your funds over the years.
- Short Term (0-3 years) – Liquidity – money to live on and cash on hand in case of an emergency.
- Medium Term (4-9 years) – Income – money invested that can spin off a regular income for when you’ll need it.
- Long Term (10 years plus) – Inflation – money invested that can keep up with inflation.
In the long run it all comes down to when you will need to spend the money – and how you can invest accordingly to match your needs. That is why it’s important 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 need them.
If you need help or advice on how to do this then get in touch with one of our advisors who will be happy to sit down with you and work out the best retirement plan for you.