GOLDEN RULES
I did the beautiful Taranaki Mountain to Surf marathon many years ago
I remember the hope, the adrenaline, and the fear as I waited for the race to start.
My main concern was pacing myself so I didn’t run out of energy before I sighted the beach.
I really didn’t want to make a snotty, staggering, desperate spectacle of myself, or worse still, be reduced to walking, or even fail to finish.
I thought of younger, fitter me eking out his resources over 42kilometres while reading a paper on rules of thumb to help retirees eke out their savings during their retirements.
But younger, fitter me had a distinct advantage in rationing his resources.
He knew exactly how far he had to run.
Your average retiree has know such knowledge.
They could live 10 years after stopping work, 20 years, 30 years, or even longer. Keep reading, keep learning Set financial goals
Balance present spending, with future spending
Knowing how much to spend, and when, is really hard when you don’t know how long you will live, or what money shocks may lie in your future (financial crises, house repairs, medical events, etc).
So last year, the New Zealand Society of Actuaries came up with four rules of thumb to help.
To make it easy, they used a $100,000 nest egg.
The 6 Per Cent Rule: Each year take 6 per cent of the starting value, in this case $6000.
The length of time they are able to do this for will depend on the investment returns/or losses they make on their money. Real income will be higher at the start of retirement thanks to the action of inflation.
The Inflated 4 Per Cent Rule: Gives $4000 in the first year, with the sum rising by inflation each year, meaning the amount taken has the same spending power all the way through, until the money runs out.
The Fixed Date Rule: Set a date you want to spend the money over (say 20 years) and run the money down over that time, adjusting each year. In year one, take 1/20th of the nest egg to spend. In year two take 1/19th, and so on.
The Life Expectancy Rule: Use the reasonably depressing Stats NZ How Long will I live calculator, and then divide your savings by the number of years Stats NZ thinks you are likely to get. It’s essentially the fixed date rule, with your projected death year as the end date.
All these rules of thumb have their plus points, and their shortcomings.
Take the Life Expectancy Rule. Great idea, but if you die 15 years later than expected, you’ll have run out of money.
If you die 15 years before you expect, you’ll leave a wealthy corpse.
But the rules of thumb do provide a way for people to think about their own strategies for making their savings last throughout retirement.
They also give people who haven’t reached retirement yet new ways to think about setting savings targets.
Incidentally, the $100,000 sum the actuaries used was the average KiwiSaver projected balance people reaching the age of 65 will have in 25 years.