Being conservative in retirement
By developing a retirement income plan you can optimise your income in retirement.
If you are too conservative in your spending at the start of retirement, you are highly likely to discover in 10-15 years into retirement that you are ahead of target and able to increase spending. 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 calculated basis to assess the chance that your funds may run out. A process for monitoring and adjusting spending is paramount to a finically secure retirement.
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. Taking this into account, we measure historical market movements which we test this through a number of Monte Carlo Calculations.
Your New Zealand Superannuation is broadly 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, 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 show 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 your portfolio drawings.
Having a solid retirement plan is a core part of feeling financially secure.
Developing a retirement income plan ensures you can maximise your spending power during retirement. By strategically adjusting your withdrawals, you can optimise the funds available to you throughout the years.
Optimising Your Retirement Income
The ability to adjust your spending based on your financial situation gives greater flexibility in your early years of retirement. Monitoring and adjusting your spending regularly is essential to maintaining a financially secure retirement while being able to enjoy travel, hobbies, and new opportunities.
Dynamic Spending Adjustments
If you are too conservative in your spending early on, you may find yourself ahead of target 10-15 years into retirement. This could allow you to increase spending when you are physically or psychologically less inclined to do so. However, taking more risk with your spending requires a calculated approach to ensure that your funds don’t run out too soon.
Avoiding Over-Conservatism in Early Retirement
To determine the level of retirement income you could achieve, we calculate the probability of your funds running out by your projected life expectancy. We measure historical market movements and test these with a number of Monte Carlo simulations to assess the sustainability of your income.
Calculating Retirement Income Sustainability
Your New Zealand Superannuation is broadly inflation-indexed. By not inflating your withdrawals from your investments, you can spend more in the earlier years of retirement, when travel, hobbies, and new opportunities are more of a priority.
Managing Inflation in Retirement
In middle to late retirement, your spending may naturally decrease. Downsizing your home, reducing travel, and simplifying your lifestyle can lower your overall expenses. As your spending needs drop, inflation will effectively reduce the purchasing power of your investment withdrawals, in line with US studies that show income needs decrease by 1-3% per year during retirement. The inflation target set by the New Zealand Reserve Bank is also 1-3%.
Evolving Spending Needs in Later Years
Being conservative in retirement
Business owners
It’s common for business owners to overvalue their businesses, as formulas and assumptions can vary. Ultimately, a business is only worth what a buyer is willing to pay for it. This often leads to many businesses being liquidated rather than sold in New Zealand, as owners struggle to find buyers at their desired price.
Overvaluing a Business
Business owners often need to diversify and save for retirement outside of their business. In New Zealand, many business owners rely on property as their primary income. Therefore, it is crucial for them to hold investments that complement New Zealand property and provide sufficient diversification to secure their financial future.
Diversifying Beyond the Business
On average, Kiwis spend 40,000 hours working towards building their retirement savings. The least they can do is spend an hour discussing how to protect and manage these retirement needs to ensure a secure financial future.
Protecting Your Retirement
Business owners
It is normal for business owners to overvalue their businesses. Formulas and assumptions vary and ultimately a business is only worth what a buyer is prepared to pay for it. This in one of the reasons that so many business are liquidated rather than sold in New Zealand.
Business owners often need to diversify and save for their retirement in other areas outside their business. This is especially true in New Zealand, where many business owners own property as their primary income. As such business owners should largely hold investments that compliment New Zealand property and sufficiently diversify their investments.
The average Kiwi will spend 40,000 hours working towards accumulating their retirement needs. The least they could do is spend an hour discussing how to protect these needs.
How we can help
We’ll work with you to create a retirement income plan that balances your current lifestyle with long-term security. By assessing your goals, risk tolerance, and market conditions, we ensure you’re on track to maintain financial freedom throughout retirement. Whether you’re looking to optimise your spending in the early years or protect your assets in later years, we’ll provide clear guidance every step of the way.