GOLDEN RULES

North Harbour News - - YOUR LOCAL NEWS -

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.

123RF

Spent force: Par­al­lels can be made be­tween marathon run­ning and mak­ing sav­ings last through­out re­tire­ment.

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