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New Zealand Society of Actuaries (Inc

)

Decumulation Options in the New Zealand Market:
How Rules of Thumb can help – A summary
by the Retirement Income Interest Group of the New Zealand Society of Actuaries

How much income can I draw down from my The four Rules of Thumb are:
retirement savings each year, given how long I want
my retirement savings to last? Rule of Thumb Most suitable for How it works

Many New Zealanders face the question of how to turn 6% Rule: Each year, People who want You receive the
their savings into retirement income (“decumulate” their take 6% of the starting more income at same nominal
value of your retirement the start of their amount each year
savings). The Retirement Income Interest Group of the
savings. retirement, to – but the length of
New Zealand Society of Actuaries outlines how New “front-load” their time you receive it
Zealanders can draw down their savings, using one spending, and are for varies.
of four suggested Rules of Thumb, in a paper entitled not concerned with
Decumulation Options in the New Zealand Market: How inheritance.
Rules of Thumb can help. This document summarises
Inflated 4% Rule: People worried You receive the
that paper, which can be downloaded from the Society’s
Take 4% of the starting about running out of same real amount
website. value of your retirement money in retirement (ie inflation
savings, then increase or who want to adjusted) each
Each retiree’s circumstances are different. One person
that amount each year leave an inheritance. year but the length
may opt for one of the Rules, but someone else might with inflation. of time you receive
find another of the Rules better suits his or her financial, it for varies.
family or health situation or income needs. For example,
some people may not want to risk their savings running Fixed Date Rule: Run People comfortable The amount you
out, but others may be happy to spend down their savings your retirement savings with living on other receive each year
by taking a higher income at the start of retirement. Some down over the period to income (for example varies but the
a set date – each year New Zealand length of time you
people want a quick and easy rule; others will be happy
take out the current Superannuation) receive it for is
carrying out some calculations. These four Rules of Thumb value of your retirement after the set date. known.
cater for these variables. savings divided by the
number of years left to Those wanting to
We believe that Rules of Thumb will be most effective that date. maximise income
if there is a single set of Rules which can be confidently throughout life, not
referenced widely and consistently. concerned with
inheritance.
Below, we explain the pros and cons of these Rules in
general and have tried to suggest the type of person each Life Expectancy Those wanting to You receive a
Rule may suit best. Any retiree should consider his or her Rule: Each year take maximise income payment each
out the current value throughout life, not year until you die
own personal situation and may also wish to speak to a
of your retirement concerned with but the amount
financial adviser. savings divided by the inheritance. varies.
average remaining life
Overleaf, we set out how guidance to individual retirees
expectancy at that time.
may look.
This is what the Rules could mean for you
The following charts show a likely income pattern if These Rules are designed specifically for the New
you follow each Rule, and they provide a guide to how Zealand environment and tested for a general
long you might live so you can see the chances of case of someone retired, receiving New Zealand
running out of money before you die. Superannuation, with some savings to call on in an
emergency as well as up to around $100,000 in a
• The income shown is just the income from an initial
conservative or balanced investment fund. They have
fund of $100,000, not any other income you might
been tested for a retiree with drawdown starting at age
have such as from New Zealand Superannuation.
65, age 70 or age 75.
It is for a person who starts drawing down from the
$100,000 fund at age 65. The figures are based on However, it’s important to consider your own personal
current investment conditions for a conservative situation. If your circumstances are more complicated
investment profile. than this, or you have a lot more invested (especially in
more risky savings), or you are older or younger than
• The income shown is adjusted for inflation. This
this, then you may still be interested in using these
is why the first Rule, which gives a flat income
Rules. Whatever your circumstances, you may wish to
of $6,000 per annum, appears to fall over time –
speak to a financial adviser.
because the $6,000 per annum will buy less over
time due to inflation – and why the second Rule, Remember:
which gives an amount which increases with
• You can take less in any year if you don’t need the
inflation each year, appears flat. If the income looks
money, but if you take more, then your savings are
level from one year to the next that means it will be
more likely to run out and you should recalculate.
a higher number of dollars in future, but have the
same spending power as today. • The graphs on the following pages estimated
future income at a point in time (age 65). Your
• As investment returns in the future are uncertain,
future income profile will vary, so you should review
the income you will receive is uncertain. The dark
your choice every five years, and at any time if your
income is income which you will almost certainly
circumstances change.
receive (at least 95% probability of receiving),
the medium colour is additional income you will
probably receive (at least 50% probability of
receiving) and the light colour is further income
you might receive (less than 50% probability of
receiving).

• The green pie-charts show the probability of
surviving from age 65 to the age shown, allowing
for typical New Zealand mortality experience.

Decumulation Options in the New Zealand Market: How Rules of Thumb can help – A summary
Page 2 by the Retirement Income Interest Group of the New Zealand Society of Actuaries
Rule 1: 6% Rule

Projected annual income and probability of survival
6% Rule, conservative profile, starting age 65, starting fund $100,000

$12,000

Probability of survival (female) 75% 56% 20%

$10,000

Probability of survival (male) 64% 42% 11%
(Adjusted for inflation)

$8,000
Annual Income

$6,000

$4,000

$2,000

$0
65 70 75 80 85 90 95 100

AGE
Income stream which is almost certain
Income stream which is probable
Income stream which is possible but less likely

Rule of Thumb Most suitable for Pros Cons Inheritance

6% Rule: Each People who want Very simple. Income will not Average
year, take 6% more income at rise with inflation. inheritance low
of the starting the start of their if drawdown
value of your retirement, to Known, regular commences at
retirement “front-load” their income. Risk of age 65; larger if it
savings. spending, and are retirement commences at a
not concerned with savings running later age.
inheritance. out within
lifetime.

Decumulation Options in the New Zealand Market: How Rules of Thumb can help – A summary
by the Retirement Income Interest Group of the New Zealand Society of Actuaries
Page 3
Rule 2: Inflated 4% Rule

Projected annual income and probability of survival
Inflated 4% Rule, conservative profile, starting age 65, starting fund $100,000

$12,000

Probability of survival (female) 30% 2%

$10,000

Probability of survival (male) 19% 1%
(Adjusted for inflation)

$8,000
Annual Income

$6,000

$4,000

$2,000

$0
65 70 75 80 85 90 95 100

AGE
Income stream which is almost certain
Income stream which is probable
Income stream which is possible but less likely

Rule of Thumb Most suitable for Pros Cons Inheritance

Inflated 4% People worried Fund likely to Lower income Inheritance
Rule: Take 4% about running last a lifetime. than other payment likely
of the starting out of money in options. and average
value of your retirement or who inheritance
retirement want to leave an Income will rise amount large
savings, then inheritance. with inflation. in relation to
increase that starting value.
amount each
year with
inflation.

Decumulation Options in the New Zealand Market: How Rules of Thumb can help – A summary
Page 4 by the Retirement Income Interest Group of the New Zealand Society of Actuaries
Rule 3: Fixed Date Rule - 20 years

Projected annual income and probability of survival
Fixed Date Rule – 20 years, conservative profile, starting age 65, starting fund $100,000

$12,000

Probability of survival (female) 75%

$10,000

Probability of survival (male) 64%
(Adjusted for inflation)

$8,000
Annual Income

$6,000

$4,000

$2,000

$0
65 70 75 80 85 90 95 100

AGE
Income stream which is almost certain
Income stream which is probable
Income stream which is possible but less likely

Rule of Thumb Most suitable for Pros Cons Inheritance

Fixed Date People comfortable Income for Amount of Lowest average
Rule: Run your with living on a known income varies inheritance
retirement other income selected from year to year. amounts.
savings down (for example period.
High probability
over the period New Zealand
of no inheritance,
to a set date Superannuation) Annual
especially if
– each year after the set date. calculation
selected date
take out the necessary.
Those wanting to is age 85 or
current value of
maximise income earlier; average
your retirement
throughout life, not inheritance
savings divided
concerned with amounts greater
by the number of
inheritance. when selected
years left to that
date is later.
date.

Decumulation Options in the New Zealand Market: How Rules of Thumb can help – A summary
by the Retirement Income Interest Group of the New Zealand Society of Actuaries
Page 5
Rule 4: Life Expectancy Rule (male)

Projected annual income and probability of survival
Life Expectancy Rule, conservative profile, male, starting age 65, starting fund $100,000

$12,000

Probability of survival (male) 23%

$10,000
(Adjusted for inflation)

$8,000
Annual Income

$6,000

$4,000

$2,000

$0
65 70 75 80 85 90 95 100

AGE
Income stream which is almost certain
Income stream which is probable
Income stream which is possible but less likely

Rule of Thumb Most suitable for Pros Cons Inheritance

Life Expectancy Those wanting to Efficient use of Amount of Some inheritance
Rule: Each year maximise income fund to provide income varies normally
take out the throughout life, not income for from year to paid; average
current value of concerned with whole of life. year; low in later inheritance
your retirement inheritance. years. amount moderate.
savings divided
Annual
by the average
calculation
remaining life
necessary and
expectancy at
relatively more
that time.
complicated.

The Rule will provide some income for the whole of your life. If you live longer than expected as at
the start of your draw down, the Rule will adjust but the income in the latest years may be very low.

Decumulation Options in the New Zealand Market: How Rules of Thumb can help – A summary
Page 6 by the Retirement Income Interest Group of the New Zealand Society of Actuaries
Rule 4: Life Expectancy Rule (female)

Projected annual income and probability of survival
Life Expectancy Rule, conservative profile, female, starting age 65, starting fund $100,000

$12,000

Probability of survival (female) 20%

$10,000
(Adjusted for inflation)

$8,000
Annual Income

$6,000

$4,000

$2,000

$0
65 70 75 80 85 90 95 100

AGE
Income stream which is almost certain
Income stream which is probable
Income stream which is possible but less likely

Rule of Thumb Most suitable for Pros Cons Inheritance

Life Expectancy Those wanting to Efficient use of Amount of Some inheritance
Rule: Each year maximise income fund to provide income varies normally
take out the throughout life, not income for from year to paid; average
current value of concerned with whole of life. year; low in later inheritance
your retirement inheritance. years. amount moderate.
savings divided
Annual
by the average
calculation
remaining life
necessary and
expectancy at
relatively more
that time.
complicated.

The Rule will provide some income for the whole of your life. If you live longer than expected as at
the start of your draw down, the Rule will adjust but the income in the latest years may be very low.

Decumulation Options in the New Zealand Market: How Rules of Thumb can help – A summary
by the Retirement Income Interest Group of the New Zealand Society of Actuaries
Page 7
Background
In our 2015 paper Income Streaming in Retirement: Options We believe that Rules of Thumb will be most effective
for New Zealand1 we estimated there will be over 1 million if there is a single set of Rules that is referenced widely
New Zealanders reaching age 65 over the next 20 years. and consistently. This set of Rules would be available
We estimated the median KiwiSaver balance of those aged to providers, distributors, regulators, commentators
65 will reach $100,000 in inflation-adjusted terms in 25 and others who communicate with New Zealanders on
years’ time. decumulation matters. There would need to be confidence
in this set of Rules and we envisage the FMA approving a
Typically, New Zealanders approaching or in retirement have set of Rules for this purpose.
New Zealand Superannuation, some savings that could
be used for emergencies and some retirement savings in Further information is contained in the full report
KiwiSaver or another fund. Most KiwiSaver providers allow Decumulation Options in the New Zealand Market: How
an income to be taken after age 65, but still the questions Rules of Thumb can help2.
of how much? and for how long? can be difficult to answer.
We believe these Rules of Thumb help to address these
questions. By virtue of being simple, Rules of Thumb add to
the range of tools available.

1
O’Connell, Alison, Catherine Edgar, Christine Ormrod, Daniel Mussett, Janet Shirley, Joe Benbow, Jonathan Eriksen and Mark Channon. (2015). Income Streaming in
Retirement: Options for New Zealand. New Zealand Society of Actuaries.
2
O’Connell, Alison, Catherine Edgar, Christine Ormrod, Daniel Mussett, Joe Benbow, and Kelvin Prisk. (2017). Decumulation Options in the New Zealand Market: How Rules
of Thumb can help. New Zealand Society of Actuaries.

Decumulation Options in the New Zealand Market: How Rules of Thumb can help – A summary
Page 8 by the Retirement Income Interest Group of the New Zealand Society of Actuaries