Overcoming the retirement fear
OPINION: ‘‘Retirement should be the time of your life and not be clouded with worry about money,’’ says financial author Martin Hawes.
‘‘You would think a nest egg that big would inspire joy, but I have long known the reality that large amounts create anxiety instead,’’ he says.
But fear can be managed if retirees have amassed a decent amount and put in place a plan for turning their nest egg into sustainable income, a process increasingly referred to as ‘‘drawdown’’.
Once, this might have been hard work, but it’s become a lot easier, and cheaper, for retirees to have their money in a professionally-managed investment portfolio thanks to KiwiSaver, says Hawes in his new book Cracking Open the Nest Egg.
Hawes says most people are now well schooled in building up a nest egg through investing in KiwiSaver, but there has been almost no focus on educating the
wider public in how to turn that nest egg into income.
It feels like that’s changing, and it’s partly the result of an ageing population.
We have a long, and ignoble history of retirees chasing risky investments advertised as offering a high income (think finance companies, contributory mortgage schemes, mortgage funds and property syndicates), or leaving their money in term deposits as inflation erodes its spending power.
But there’s an increasingly easy-to-access alternative.
Hawes advocates for most retirees to keep their money invested in a balanced portfolio, for much of their retirements.
KiwiSaver schemes have balanced funds; roughly half in growth assets like shares, and half in income assets like bonds and cash deposits.
And these days KiwiSaver is open to people aged over 65, and KiwiSaver providers allow regular withdrawals.
It can be frightening to take on the risk of investing in assets like shares and bonds, that rise and fall in value, but Hawes says in order to get some return, retirees must take some risk, and he prefers the risk of a diversified portfolio.
As well as embracing balanced portfolios, Hawes wants people to embrace the idea of an orderly spending of their capital. In a low interest-world, all but the richest retirees will need to spend capital to live decently.
This decumulation is often now referred to as drawdown, a term capturing the drawing down, and spending, by retirees of their capital.
Actuaries have ‘‘rules of thumb’’ people can use in retirement to work out how much they can sustainably draw down from their portfolios.
People’s drawdown rates vary, depending on things like their age, health and the size of their portfolios.
People’s personal drawdown rates are usually expressed as percentages of the investment capital they have at the start of their retirement, he says.
The most common drawdown rate is 4%, Hawes says.
‘‘This means that in each year of retirement you could draw down 4% of the initial amount you had when you started retirement,’’ he says.
The aim for most people is to work out a personal drawdown rate that will mean they run a low risk of outliving their money by spending too much.
The other three drawdown rules of thumb are the 6% rule (like the 4% rule, but taking more), the fixed date rule (work out how many years you want the money to last, and divide the amount by the number of years to get the annual amount to draw down), and the life expectancy rule (like the fixed date rule, but based on retirees tracking down data showing how many years actuaries expect them to live).
Knowing the rules of thumb can help retirees work out their drawdown plans for the best retirements they can get.
What retirees need, however, is more online tools to help them plan their retirement incomes, and more KiwiSaver providers investing in educating people nearing 65.
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