IN DEPTH GUIDE
This lifestyle guide ‘In Retirement’ is designed for retired New Zealanders looking at achieving a comfortable lifestyle while making their savings last through their lifetime. We’ll be focusing on the key things you need to think about during your golden years. We have plenty of practical tips and insights to share, so let’s get started.
IMPORTANT: Please note that the content provided in this guide is of a general nature. It is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance. Feel free to get in touch if you have any questions, comments or concerns.
What you need to be thinking about
What you need to be thinking about
We covered some of the important questions earlier in this guide. We talked about how flexible your plan needs to be, and how different assets and tools can fit into your long-term strategy. We saw how diversification and a nuanced approach to investment risk can help you protect your funds while still seeking growth. And we briefly discussed how the nature of your expenses might vary as you age.
So, here are a couple more things to consider, starting with…
Your drawdown strategy
You’ve worked hard to save for retirement, and now is time to reap the fruits of your labour. So, how much can you afford to without depleting your funds too early? Would you like to receive your money as a lump sum or regular monthly payments for the rest of your life? There’s no one answer to these questions: again, it’s entirely up to you.
One frequently mentioned rule of thumb is the ‘4 per cent rule’. In a nutshell, you add up all your investments and withdraw 4 per cent of that total during the first year of retirement. Then slightly increase or reduce that amount to account for inflation each subsequent year. This should allow your retirement portfolio to last for 20 years. But as simple as it sounds, this method has more than one potential downside, the biggest of which is that it’s based on many assumptions.
For example, it assumes that you can adjust your spending based on the rate of inflation rather than your spending needs or how your portfolio performed. Also, 20 years may not be enough. For all intents and purposes, it all seems a little too rigid to be suitable for everyone.
Inflation has been increasing significantly in recent times. If you don’t want to burn through your savings faster than expected, make sure you build an inflation hedge around your retirement income.
Again, there can be different strategies for curbing the effect of inflation. For example, you could have a ‘padded’ annual spending budget, where a higher inflation rate is already factored in. Or you can add investments to your portfolio that are likely to increase in value as inflation rises. All the while, keep a close eye on your spending, to avoid adding even more to the inflationary fire.
Your estate plan
And finally, would you like to leave a legacy to your children and grandchildren? It’s only natural to look at your finances and think about how much you’d like to leave behind. Investing money during retirement can also be for your beneficiaries.
Having said that, you may want to prioritise your retirement needs first. Once you’re satisfied with your retirement provisions, your legacy is likely to fall naturally into place. Also, think about what ‘legacy’ means to you and your family: in addition to leaving a lump sum to your loved ones, it could be quality time spent with them, creating lasting memories.