Ensuring that you have enough money in retirement can present a few financial challenges, such as how much to save and how much to spend. See how some retirees are making their money last.
We spend our lives saving with little thought for our ultimate decumulation or spend down. Yet spending a lifetime of savings is a highly complex process, which done right, will ensure you live comfortably in your twilight years.
To have your capital last as long as you do would be ideal. Only a tiny majority of people will have saved enough for that scenario.
Most retirees will have to live on the capital as well as interest, dividends and other earnings to achieve the income they want in retirement. Although people often fail to realise this fact, this slow spend down of the capital is the basis on which financial planners design accumulation and decumulation plans.
The ideal situation is that you continue to invest some of your capital for growth – taking into account that you could potentially live for 40 years after retiring.
Another portion is invested in safer short-term investments and a small amount of earnings and capital is withdrawn each month. Getting that balance right requires as much investment acumen or more than you needed to accumulate the money in the first place.
When it comes to how much capital you can afford to use up each year, I’ve heard more than once that it should be no more than 3-5% annually to ensure some of your capital lasts the distance.
The spend down period comes with a whole host of risks, that many have never thought of. If you succumb to them and your money’s eaten up too quickly, are you going to be able to live on New Zealand superannuation?
The risks include inflation, which erodes the value of your capital, living longer than you expected, interest rate risk, stock market risk, public policy risk such as tax increases, and also fraud and elder abuse, which sadly afflicts too many of our retired folk. That’s not all, the death of a spouse or another change in marital status can affect your income as can changing housing or care needs.
People who haven’t saved enough in their lifetime to cover their retirement needs, sometimes keep working full or part time – postponing the spend down. Others downgrade their properties to free up capital or take out reverse equity mortgages (also called lifetime loans) against their property.
As well as the risks, another issue is that many retirees have a hodgepodge of investments: cash, funds, shares, term deposits, rental property and even businesses. Working out which assets go first and what percentage of your net wealth is held in growth stocks mightn’t be easy. Even a dyed-in-the-wool DIY investor might benefit from a second opinion.
Finally, it’s not the end of the world if you reach the grand old age of 80 or 90 and your capital has gone. Research has shown that people’s needs greatly reduce as they get older.