The record shows I took the blows
Kiwis are a bunch of rebels. Admit it. There’s nothing we like better than riding rough-shod over social norms, proving there’s another way.
When it comes to retirement, My Way should have been the national anthem. There’s nothing like a rousing rendition of Frank Sinatra telling us he’s lived life to the full, to make us all believe we’re invincible.
It’s an endearing quality, so I probably shouldn’t have been surprised at the outcry when I suggested people need a savings pot of 10 times their final salary for a comfortable retirement.
All hell broke lose in cyberspace. We do not like being told we need so much money. I agree, it grates, but unfortunately I have no talent for singing for my supper.
I’ll re-state my case, of which I’m certain
If you wish to retire on around half your pre-retirement salary, sensible preparation would be saving 10 times its value. Someone on $200,000 pre-retirement needs $2 million to generate $100,000-a-year retirement income. Do your own numbers; earning $80,000 requires savings of $800,000 for a $40,000 smooth transition.
The maths is not wrong. All the numbers are inflation-proofed for 25 years of retirement, that’s why it’s difficult to pull apart. There’s a load of modelling behind them and a 90 per cent chance you won’t run out of money. This also makes the reverse true. An equally high chance of having money left in the pot on death. At the tail end of the probability bell curve, those amounts could be large.
If investments deliver some unexpected fat it could leave a lump sum for later-life spending or an inheritance to pass on. Note the ‘‘if’’. Modelling also has to prepare for the other side of the risk equation and a safe level of income to draw down.
In practice we can create the same amount on a smaller pot of money by taking more risk. When I pondered the uproar it did make me realise I’m a rule-breaker, too.
I certainly don’t practice what I preach.
When it comes to income drawdown I use a 50 per cent confidence level of not running out of money. Some people would have heart failure at that, but I don’t want unspent lumps left on my death. That requires active monitoring and re-running of the model with a financial adviser.
Then there’s the ‘‘norm’’ of a 60/40 equity-bond portfolio. Mine is 70/30 and this would give a number of retirees constant palpitations. In the current environment I can confirm it takes some stomach.
I planned each charted course
Another rule-break is the Lifetime Asset Allocation Model. You take less risk as you approach retirement in case there’s a lastminute plunge in markets. For those who don’t take financial advice and have small portfolios, it’s perfect.
Yet it’s another case of I-wishI-told-the-truth-more-often. Do I use the model myself? No. At age 60 and 65 a substantial proportion of a portfolio has time to recover and