Manage your money in retirement

By Tom Hartmann

Life after you stop working can mean living without a steady income, so you’ll have some choices to make.

This might mean changing how you budget or applying for extra support.

If you’ve got KiwiSaver or other savings or investments, you’ll need to decide how much money to use at a time. Will you run out? Where should you keep your funds over such a long period?

It takes some forward thinking and savvy decisions in order to make that money last for what can be 30 years or more in retirement.

Stretching your retirement money

People don’t typically spend consistently throughout retirement. There are usually higher expenses early on (as we tick off the bucket list). Spending generally then falls during the middle stage before picking up later in life due to increasing health costs.

So studying our options, planning and getting quality advice become more important than ever.

How to estimate your retirement income

The retirement calculator at sorted.org.nz can give you an idea of how long your money can last through the years. By setting your age to just before 65 and then inputting a certain amount of retirement savings, it shows how much steady income might be expected from a balanced fund.

How much retirement money should you use at a time?

The retirement calculator shows just one way to draw down savings, using a rule of thumb called the ‘life expectancy rule’. This means stretching savings for as long as you estimate you’ll live. It’s not the only one, however.

The New Zealand Society of Actuaries has offered four rules of thumb that can help us make decisions on how to draw down our funds in different situations:

The Life Expectancy Rule: Each year, take out the current value of your savings divided by your average life expectancy at that time. This is for those who want as much income as possible during retirement and are not focused on leaving an inheritance.

The 6% Rule: Each year, take out 6% of the starting value of your savings. This is good for those who want to spend more at the start of retirement, when they are more active, and who are not focused on leaving an inheritance.

The Inflated 4% Rule: Take 4% of the starting value of your savings, then increase that amount each year with inflation. This works well for people worried about running out of money, or those who want to leave a legacy.

The Fixed Date Rule: Run down your savings to a set date. Each year, take out the current value of your savings divided by the number of years until that date. This is good for those who are okay with living off of NZ Super after their chosen date.

Keep your retirement money in three buckets

During retirement, there are three challenges to overcome with the money you have:

• Liquidity: For the short term (0–3 years), you need money to live on and cash on hand in case of an emergency.
• Income: For the medium term (4–9 years), you need money invested that can spin off a regular income for when you’ll need it.
• Inflation: For the long term (10 years plus), you need money invested that can keep up with inflation. Money loses its buying power over time, so in the long term it can’t be just stuffed under a mattress – by the time you’re ready to spend it, it will have lost much of its value.

The solution to these three challenges is to have your savings in three buckets:

• The short-term one can hold cash.
• The medium-term bucket can be filled with income-producing investments such as bonds.
• The third long-term one can hold growth assets such as shares or property.

Spreading funds across all three buckets helps prepare for decades of retirement. It all comes down to when you will need to spend the money – and you can invest accordingly to match your needs.

You’ll need to review your situation each year and move money from long term to medium term, and from medium to short. This helps to make sure your savings will be there when you need them.