How to drawdown money in retirement

The Retirement Income Interest Group (RIIG) of the New Zealand Society of Actuaries has updated its four Rules of Thumb for engaging retirees thinking about drawing down their KiwiSaver and turning it into income, to reflect current investment and longevity prospects.

RIIG’s Rules of Thumb for KiwiSaver drawdown are:

1. Take 6% of the starting value of your retirement fund each year
2. Take 4% of the starting value of your retirement fund, then increase that amount each year with inflation
3. Run down your retirement fund over a period to a Fixed Date
4. Each year, take out the current value of your retirement fund divided by the average remaining life expectancy at that time

Each Rule gives different income amounts, for different lengths of time, with different risks and levels of certainty.  The idea is not to ‘set and forget’ one Rule to use for the rest of life, but instead to help people think through their own priorities and appreciate how much income is possible, with what risks and uncertainties.

Drawdown can start on one track and then switch if personal priorities or investment conditions change.  RIIG has been an advocate for Rules of Thumb being part of a drawdown framework to be offered consistently by KiwiSaver providers and advisers, which the Retirement Commissioner endorsed in her 2022 Review of Retirement Income policies.

In its paper RIIG discuss the pros and cons of each rule, and who they might be most suitable for, illustrating with estimates of how much income will be available, and for how long compared to the probability of still being alive:

The 6% Rule is most suitable for those who want to spend most money early in their retirement by way of a regular, fixed income.  They are not concerned with inheritance or a relatively high risk of the retirement fund running out within their lifetime.

The Inflated 4% Rule is most suitable for people who are worried about money running out in retirement or who want to leave an inheritance.  They don’t mind a lower income initially than other options, and like the idea of income keeping up with inflation.

The Fixed Date Rule is most suitable for people who want to know when their fund will run out, perhaps because they are happy to rely on New Zealand Super after then.  They don’t mind calculating their income each year which will vary depending on the fund’s investment performance.

The Life Expectancy Rule is most suitable for those who don’t mind doing a more complicated calculation each year in order to make the most efficient use of money over their lifetime, although the level of income will vary.

In the new report, RIIG also illustrate options to draw down more income from a KiwiSaver fund. The most certain way is to start drawdown later. Increasing the amount of growth assets in the fund may lead to higher returns which could yield more income, but it also increases risk and the potential for less income to be available.

The report also shows the available income from each Rule of Thumb from typically-sized KiwiSaver funds, based on RIIG’s 2022 analysis of the distribution of KiwiSaver account balances. 

For example, a current 50-year-old with a median KiwiSaver account in a balanced fund who continues contributing could receive, from age 65, around:

• $7,500 a year probably lasting until age 94 from the 6% Rule
• $5,000 increasing with inflation throughout life from the Inflated 4% Rule
• $5,000 probably increasing for 25 years from the Fixed Date Rule
• $5,000-$5,600 in the first year, but with volatility in future income driven by investment performance from the Life Expectancy Rule.

DOWNLOAD THE FULL PAPER HERE