Video: will you outlive your retirement plan?
We’re all saving for our retirement. But what happens to patient savers when they finally reach the day to clear their desks and head out fishin’ or travelling?
Many people believe that they’ll live off the income from their savings combined with New Zealand Superannuation when they retire.
I for one had this delusion for many years, because this is what my parents did. Sadly they didn’t really get to enjoy the fruits of their savings because they believed that they needed to keep the capital in place. The reality is that all but the most wealthy will need to eat into some of the capital.
The trouble is that those who retire with good pots of retirement savings are usually the fiscally prudent. It’s hard, after a lifetime of being careful, to change your ways and spend some of that money.
Getting it right requires a withdrawal strategy. It’s also about teaching yourself to spend. I’m making an assumption here that RaboDirect customers don’t need to be told to spend wisely, or you wouldn’t have built up the savings you have.
Financial planners should be able to provide their clients with a comprehensive spend down/decumulation plan. This is a plan that allows you to map out your spending so that you don’t hang on to your capital unnecessarily, but still have some left should you live to become an Octogenarian, Nonagenarian, or Centenarian.
I’ve searched the net many times, yet to find the perfect tool for private investors. In the meantime, Al's Simple Retirement Planning Model (version 4) is a very useful spread sheet for planning your retirement spending.
There are many variables. One includes the fact that you might not actually get “average returns” from stock market investments. I found an excellent blog on this topic that is worth reading.
It’s also American, so you’ll need to change the heading “410k” to “tax-deferred savings” and cut out “Roth” because it’s a tax-free savings scheme that we don’t have. Otherwise this sort of spend-down plan transcends national boundaries.
Using Al’s model requires a working knowledge of spread sheets. A couple of web-based calculators to check out are XMLs: "How will retirement impact my living expenses?" calculator, or the: "I’m retired, how long will my savings last?" calculator.
It’s worth remembering that your spending will change when you retire. Some of the changes will include:
You’ll have more time to spend.
You won’t have commuting and dry-cleaning costs.
All those lovely perks from work are a gonna.
At some point your medical expenses are likely to increase.
A Super Gold Card will make some things cheaper for you.
Retired people get discounts on things such as insurance and entertainment.
You may work part time, start a business, or do consulting in your retirement, all of which bring in money.
Inflation will eat into your savings over time.
Personally, I’d love to see a thriving annuity market in New Zealand. Annuities give people a guaranteed income for life and take away a lot of the guesswork, even though they’re not always the best value for money.