Retirement income plan
Retirement
“… one of the reasons we enjoy you so much – it is a serious business but you don’t make it ‘heavy.”
Don’t be too conservative in retirement
By developing a retirement income plan you can optimise your income in retirement.
If you are too conservative in spending at the start of retirement, you are highly likely to discover in 10-15 years into retirement that you are way ahead of target and able to increase spending substantially. Just at the time that you are physically and perhaps psychologically least likely to want to do so.
The ability to adjust spending dynamically gives greater scope to spend more in your early years of retirement. However, taking more risk with spending requires a sensible basis to assess the chance that your funds may run out. A process for monitoring and adjusting spending if needs be – in other words a “retirement income plan”.
To determine the level of retirement income that you could achieve we calculate the probability of your funds running out at a projected life expectancy age. To take into account market movements we test this through a number of Monte Carlo calculations.
If the target confidence level drops more than 5% then your spending level will need to be decreased. If the confidence level rises 5% above the target then spending can increase to bring it within 5% of the target.
Your New Zealand Superannuation will provide for the basic needs. It is inflation indexed.
By not inflating the drawings from your investments you are able to spend more in the earlier years. This is when you have the time for travel, hobbies, and newfound opportunities to spend money on.
In the middle to late retirement years, spending may slow. Houses sometimes get downsized, travel may lessen, cars might be driven less, and the trappings of consumerism lose some of their appeal as some retirees spend less time accumulating possessions and may instead feel a calling towards simplification. As your spending needs drop inflation will effectively decrease the purchasing power of the drawings from your investments.
This is in-line with US studies which showed that the income needs of retirees drops by around 1-3%pa during their retirement years. The inflation target set by the New Zealand Reserve Bank is also 1-3%. This is our rationale for not inflation adjusting the portfolio drawings.
Having a solid retirement plan is a core part of feeling financially secure.