You can’t take it with you: How to best deal with your retirement savings

New Zealanders are striving to eek out the cash they’ve put away for their later years while still wanting to live a little. Kevin Norquay discovers Martin Hawes has pages of advice.

‘‘Most people die with more left than they were thinking, and they’ve therefore left some of their money on the table, and some of their lifestyle on the table.’’ Martin Hawes, left

Cautious Kiwis are dying with money in their pockets rather than leading a good life in retirement, or passing it on to the younger generation, says financial author Martin Hawes.

Retirement has been in the headlines, with fears that New Zealand is headed for stress as people live longer in retirement, while being less likely to reach the end of their working lives mortgage-free.

Hawes this week released his 23rd book, Cracking Open the Nest Egg, in which he outlines the best ways for people to stretch out their life savings and offers a range of decumulation options for those who reach 65 mortgage-free, as well as a mix of investments that reduce the risk to their savings.

It’s complex, and easy to get wrong, he tells the Sunday StarTimes.

‘‘Most people die with more left than they were thinking, and they’ve therefore left some of their money on the table, and some of their lifestyle on the table. I don’t care too much about the money. I care hugely about the lifestyle. There’s a window of opportunity for people in their mid to late 60s through the 70s and a few of them into their 80s, to spend more.

‘‘Most people underspend, and therefore they under live; whether that’s travel domestically or internationally, or the things that they want or the things that they want to do.’’

Hawes believes older people often start to give away their money later than they should.

‘‘Children – or potentially grandchildren – shouldn’t have to wait for somebody to die at 90. As long as you’re satisfied that you’re going to enjoy a good lifestyle, do the things you want to do.’’

His ideas are set against a backdrop of rising house prices, average homes costing more than $1 million, and younger people struggling to afford property, so being confined to the uncertainty of longterm renting.

The one great unknown that trips people up, is how long they expect to live. When you reach 65, you’re on average likely to be retired for around 25 years, living largely on New Zealand superannuation, savings and investments.

We are lucky to have actuaries – who deal with the measurement and management of risk and uncertainty – to figure all those details out, Hawes says. It’s a science.

Cracking Open the Nest Egg is designed to help readers survey retirement spending options.

‘‘It’s long been a concern of mine. It is an area that I’ve been interested in for 25 years. This whole decumulation thing is very difficult, but very interesting. There’s so many moving parts to it, and I have a need to tell people what I think is going on.’’

And part of what he sees as going on, is retirees ultra-cautious with their money, living in fear it will run out, so they cut back on expenses, or choose not to help out their families.

Early in retirement that is a worthy fear, yet that is when expenditure is likely to be at its highest. As you grow older your desire and ability to do activities and to travel wanes, so you spend less.

‘‘Your expenditure is going to almost automatically decrease as you get older,’’ Hawes says.

‘‘You’ve got to be careful because you may need healthcare, I’m not saying give it all away at age 75, I’m not saying that for a minute, but we can probably start to make gifts earlier in retirement. We imagine our older age pretty much as it is now but actually in 10 or 15 years there will be things we may not be able to do – not just not going to be able to do, we are not even going to want to do them.’’

In his book, Hawes offers investment ‘‘buckets’’ – from shares, to cash, to term deposits, to listed property and so on – and four options for spending your nest egg wisely.

Drawdown rates depend on likely investment returns, likely tax rates, future inflation, life expectancy, and your expected expenditure patterns (spend more younger, less as you age, for example).

● Spend 4 per cent of your nest egg each year but increase it with inflation, so it lasts 30 years (with interest taken into account). If you have a $100,000 nest egg you allow yourself

$4000 a year, or

about $77 a week. A good starting place, but most people don’t retire at 65, or need income for 30 years.

Spend 6 per cent of your nest egg annually, but don’t increase it with inflation. So with $100,000 in the nest egg, you take $6000 each year, or about $115 a week. This suits those who retire later, have a shorter life expectancy, and want to live it up more early in retirement.

Fixed date rule: work out how long you want your money to last, then divide it evenly by years. So if you chose 18 years and have $100,000, that’s $107 a week. This suits those who don’t want to leave an inheritance, and believe superannuation can

sustain them when the nest egg runs out.

Life expectancy rule: hard to work out, as life expectancy changes as we age. But let’s say both your parents died aged 78, so you choose that. You retire at 68, so your $100,000 has to last 10 years, that’s $10,000 a year, or $192 a week. It’s not a great plan if you instead live to 90, though.

Hawes outlines investment options and decumulation options to help people decide based on their own spending psychology.

‘‘I learned just how hard it is for people,’’ he says. ‘‘You know, the 4 per cent or 6 per cent, or whatever the number is, that comes out nice and simple, but the actual maths and ... the assumptions in behind that – the assumptions of longevity, the assumptions of inflation rates, the assumptions of investment returns – are really, really complicated.’’

If you aren’t mortgage-free going into retirement – as is likely to be the case more and more often – or if you are renting, and at the mercy of landlords, it is even more complex, even more uncertain.

If you have been a lifetime renter, you’d best have a pool of savings by time you retire, Hawes

the says.

‘‘Save more through either KiwiSaver or a KiwiSaver-type fund. You will need excess savings. In saying that you are very exposed to rental inflation and you’re very exposed to a lack of security of tenure,’ says Hawes, who chairs the Summer KiwiSaver Investment Committee and is Director of Lifetime Income.

‘‘If you don’t own a house going into retirement, you’re very exposed to increases in rents.

‘‘Owning a house covers you for future house price increases and rental increases, and the rental thing is most important for retired people.

‘‘You’re continually exposed to the landlord ringing up and saying ‘we’re going to sell the house’ ... and you’re back to finding new digs again.

‘‘You don’t want to do that throughout retirement. I don’t have a simple answer for it, I’m afraid, other than the fact this country has to build more houses.’’

Hawes himself is older than 65 and still working, though he is picking and choosing what he does, and how much time he spends doing it.

Why? It’s more about mind, than money, he says.

‘‘I don’t regard myself as grown up, and won’t be grown up until the day I die. I will keep learning until I die.’’

Cracking Open The Nest Egg, by Martin Hawes (Upstart Press, RRP $39.99)