Everyone’s circumstances are different and there is no one size fits all rule when it comes to financing a retirement. Some may want to spend every dollar they have while others will want to keep some left in the kitty for an inheritance or bequest. Of course, people will have different levels of savings too – many will own their own home while others may still be renting when they come to retire, for example. It is important to consider your financial position as early as possible.
One resource that is particularly helpful when thinking about your options is the Four Rules of Thumb, created by the Retirement Income Interest Group of the New Zealand Society of Actuaries. It lays out four rules that can be used to determine how you could spend your retirement savings, accounting for the differences in people’s situations:
6% Rule
Each year, take 6 per cent of the starting value of your retirement savings.
Most suitable for: People who want more income at the start of their retirement, to “front-load” their spending, and are not concerned with inheritance.
How it works: You receive the same nominal amount each year – but the length of time you receive it for varies.
Inflated 4% Rule
Take 4 per cent of the starting value of your retirement savings, then increase that amount each year with inflation.
Most suitable for: People worried about running out of money in retirement or who want to leave an inheritance.
How it works: You receive the same real amount (i.e., inflation adjusted) each year but the length of time you receive it for varies.
Fixed Date Rule
Run your retirement savings down over the period to a set date – each year take out the current value of your retirement savings divided by the number of years left to that date.
Most suitable for: People comfortable with living on other income (for example New Zealand Superannuation) after the set date. Those wanting to maximise income throughout life, not concerned with inheritance.
How it works: The amount you receive each year varies but the length of time you receive it for is known.
Life Expectancy Rule
Each year take out the current value of your retirement savings divided by the average remaining life expectancy at that time.
Most suitable for: Those wanting to maximise income throughout life, not concerned with inheritance.
How it works: You receive a payment each year until you die but the amount varies.
You can read the introduction to The Rules of Thumb document here or read the full summary document here, including helpful graphs (if you’re a visual learner like me).
Disclaimer: This article is not intended to replace professional financial advice. It is recommended you seek your own independent financial advice from a trusted professional.
Updated: 12 May 2023