Katrina Shanks is chief executive of Financial Advice NZ.

OPINION: I’m still quite a few years away from having to decide when I will retire.

I love my work and it’s hard to imagine not continuing to do something to keep me busy and out of trouble past 65, whether it be paid work or volunteering.

But I imagine one of the trickiest decisions retirees have to make is how to ensure their nest eggs – KiwiSaver, bank savings, or other investments – can contribute to giving them a comfortable standard of living, in conjunction with their NZ Superannuation, through their twilight years.

Not knowing what expenses might be around the corner or what other challenges life will throw at us means we need to be prepared for when our income has mostly vanished.

Being prepared is not only about saving from an early age or investing wisely, which is extremely vital if we are to have enough to retire on, but it’s also how we spread that money over our retirement years to ensure we can live the life we want.

But that’s not an easy thing to do because no one knows how much their investments or savings will return, or what the cost of living will be like in a couple of years.

You almost have to be an economist to work that out to come anywhere near close.

The good news is help is at hand.

A report has done a lot of work on this and offers options on how regular drawdowns from an investment work over retirement for different people.

Drawdown Rules of Thumb: Update 2023 is the work of the Retirement Income Interest Group of the New Zealand Society of Actuaries.

It uses as its base a person retiring at age 65 with a balanced KiwiSaver fund of $100,000. It does not take account of other investments, savings, or NZ Superannuation.

The report looks at four rules of thumb, each providing a different income profile for retirees to consider.

6% Rule

Under this rule, a retiree each year draws down 6% of the starting value of their KiwiSaver fund.

This is most suitable for people who have plans for how they want to spend their early active retirement, they don’t mind if they run out of money later on, and are not concerned with keeping an inheritance for their children. They’ve got either other investments or are happy to live on NZ Super alone after they spend their savings.

The advantages of this rule are it’s simple and retirees know what their income will be and that it will be regular.

This rule is simple to operate, needing just one calculation at the start. The disadvantages are the income won’t rise with inflation, because of the high withdrawals, and there is a risk the fund will run out within their lifetime.

4% Inflated Rule

This is suitable for those worried about running out of money in retirement or who want to leave some inheritance, but is likely to give lower income each year than others.

Under this rule, retirees take 4% of the starting value of their fund and then increase those withdrawals each year by the current rate of inflation.

They get returns for the whole of their life, but also don’t mind if they don’t spend it all.

The big advantage is their fund is likely to last their full lifetime and it will rise with inflation.

It is relatively simple to operate, needing one calculation at the start, though the amount does need increasing each year for inflation.

Fixed Date Rule

This is for those who want to maximise their income, are not concerned with leaving an inheritance, and are happy living on other income (such as NZ Super) after a set date.

A retiree runs the fund down to a set date, with drawdowns calculated by dividing the current value of the fund by the remaining years.

The advantage is the income is known for the set period. Disadvantages are income will vary as investment returns vary, and it requires a calculation to be done each year.

It’s relatively simple to operate, though it does need a simple calculation each year.

Life Expectancy Rule

This is for those wanting to maximise their income and not worried about leaving an inheritance.

The annual drawdown is the current value of the fund divided by the average remaining life expectancy at that time.

It’s an efficient use of funds for whole of life. Disadvantages are the income varies depending on investment returns, with low income in later years. It is also quite complex to operate on a DIY basis because it needs the income to be calculated each year, based on a life expectancy number from StatsNZ, and possibly modified by personal choice.

Options for other income

Of course, there are other ways of increasing regular income, and the report looks at these:

• Starting drawdown later. This is the most certain way to be able to draw down more income – other than putting in more money while you can. Starting later means the fund is more likely to last to a higher age and/or give more income.
• Investing in a fund with higher expected returns. While doing this allows for more income, there is more risk, with both the range of potential income levels and the range of ages at which income runs out becoming wider.
• Drawing down more. Retirees can choose to increase the amount taken each year, or in some years, although income will then not last as long.

The report stresses the importance of not ‘setting and forgetting’ a drawdown plan.

Plans should be reviewed regularly, especially if investment conditions change, and that’s great advice. Regular reviews should be done not just because investment conditions change, but also because your personal circumstances and your priorities will most likely change, too.

This report is well worth a careful read to help you plan your way through retirement and to see first-hand the importance of putting in as much into KiwiSaver and other funds as you can, while you can.

I haven’t reflected on how I will draw down on my investments when I come to retire. I imagine I will have a more active lifestyle in the first 10 years so will weigh the drawdowns accordingly. One thing is certain – I will be doing the calculations carefully, so I make the most of my retirement.

As my financial adviser would say, the earlier you start planning for your retirement, the easier and more comfortable it will be.