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Retirees told 6% drawdown rule an option

The New Zealand Society of Actuaries says people trying to make their savings last through retirement could draw down 6% of their savings pot a year - but the country's only retirement income product provider says its calculations are flawed.

Friday, May 5th 2017, 6:00AM 4 Comments

by Susan Edmunds

It has released a new report that outlines four "rules of thumb" for New Zealanders in the decumulation phase.

"The rules are a guide to help retirees plan the level of income their savings can support, so they don't run out of money too soon, or leave too much behind, in line with their personal priorities," society president Andrea Gluyas said.

The society's Retirement Income Interest Group tested several possible rules for a typical retiree, modelling investment returns and life expectancies.

It decided on four key rules:

The 6% rule, in which retirees take 6% of the starting value of their savings each year. This created a greater risk of savings running out within someone's lifetime but was simple and created known income, the society said.

The inflated 4% rule, in which 4% of the starting value is taken each year, but adjusted for inflation. This was likely to make the fund last a lifetime, the society said, but was a lower income level, providing just 4% for every $100,000 invested.

The fixed-date rule, in which retirement savings were run down to a set fixed date, by taking out a calculated amount each year. This would give varying levels of income but was secure for a certain period, the society said. If someone at 65 decided they would run $100,000 down over 20 years they would drawn down more than 10% of their savings pot in the year they were 84.

The life expectancy rule, in which the balance was divided each year by the number of years a person was expected to have left to live.

The calculations were made with an assumption of 2.5% per year real returns.

Co-author Christine Ormrod said advisers could use the rules with their clients. "The more money you have, the more options you have got and the more things you may want to do with it."

But the report has come in for criticism, particularly from those who say that in the current environment even 4% may be too high a rate of drawdown.

Lifetime Retirement Income managing director Ralph Stewart said the guidelines were incomplete and did not address the issues of volatile investment returns and unknown life expectancy.

He said one of the biggest retirement risks was that someone would outlive their savings. What constituted a safe withdrawal rate was not absolute and was contestable, subject to individual circumstances, which could change, he said.

Ormrod said factors such as longevity could alter how well the rules would work for individuals. "If you know you come from a family where everyone lives to 100 you'll probably be more cautious."

She said the report allowed for longevity risk and volatility in investment returns. 

"People have different preferences for income now or income later, certainty of income or being willing to take risk, leaving an inheritance or spending all their savings before they die. The rules are designed to be both simple enough to use and to help retirees think about their own situation. We do not presume the primary aim is to ensure a level income until death."

Tags: decumulation

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Comments from our readers

On 5 May 2017 at 10:15 am Brent Sheather said:
Very useful article. Good work!
On 5 May 2017 at 10:17 am Murray Weatherston said:
Where can we find the paper?
It will make an interesting read - I thought the original "Rule" from USA was 4%, but that recent work incorporating expected lower returns from all asset classes was suggesting that 4% will be too high for the near term future.
On 5 May 2017 at 10:22 am Murray Weatherston said:
Can answer my own question - here is the URL for the Full report

https://actuaries.org.nz/wp-content/uploads/2015/10/NZSA-full-doc.pdf
On 8 May 2017 at 11:57 am Longitude68 said:
Our findings via a different path concluding at a similar outcome and danger. The need for far greater skills and knowledge for advisers with portfolio construction at an individual client level is essential as at a fund level only so much can be done.Sequencing risk and slecting the right sort of equity income funds (not chasing spot yeilds) are aspects for additional tactics to be employed.

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