Scrimp, save, splurge? Long-term spending strategies for retirement

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Scrimp, save, splurge? Long-term spending strategies for retirement

Published on 21/11/2024

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kiwisaver

Planning for retirement isn’t just about saving—it’s also about spending! While setting a savings goal is essential, the next big question is: how do I spend my money wisely to ensure it lasts?

Retirement is a time when financial priorities shift. Many retirees focus on creating meaningful experiences, like traveling to bucket-list destinations, pursuing new hobbies, or treating loved ones to special moments. Others prioritize comfort and security, such as downsizing to a low-maintenance home, upgrading their car, investing in healthcare, or building financial legacies for their families. Ultimately, retirement spending is as diverse as retirees themselves. The key is to plan carefully so your savings support the retirement lifestyle you want over time.

Managing retirement withdrawals

For a lot of us New Zealanders, KiwiSaver will be our main retirement nest egg. Once you turn 65 you can start to make withdrawals. Many opt to take a lump sum at retirement to fund a big trip, a new car, or another major expense. However, most savings are typically drawn down gradually to cover day-to-day living costs. To help guide these decisions, the clever folks at New Zealand Society of Actuaries (NZSA) offer four withdrawal strategies tailored to different retirement goals. Here’s a breakdown:

RULE	DESCRIPTION	EXAMPLE	PROS + CONS
Life Expectancy Rule*	Withdraw the current value of your savings divided by your remaining life expectancy. Best for: Those who want to maximize income without focusing on leaving an inheritance.	At 65, with $500,000 saved and a 25-year life expectancy: $500,000 ÷ 25 = $20,000 per year.	Pros: Simple to plan. Cons: Risk of running out of money if you live longer than expected.
The 6% Rule	Withdraw 6% of your initial savings value annually. Best for: Retirees who want to spend more in the early, active years of retirement.	With $500,000 saved, withdraw $30,000 in year one. In subsequent years, withdraw 6% of the remaining balance.	Pros: Higher early withdrawals for active years. Cons: Greater risk of exhausting savings.
Inflated 4% Rule	Start by withdrawing 4% of your initial savings and increase annually to keep up with inflation. Best for: Those looking to balance withdrawals with leaving a legacy.	With $500,000 saved, withdraw $20,000 in year one. With 2% inflation, withdraw $20,400 in year two.	Pros: Preserves savings longer. Cons: Lower withdrawals in early years, compared to other methods.
Fixed Date Rule	Plan withdrawals to deplete savings by a specific date. Best for: Those comfortable relying on NZ Super after their chosen date.	Retiring at 65 with $500,000, planning to use it by 80. Withdraw $33,333 annually for 15 years.	Pros: Provides predictable income. Cons: Value of money decreases over time, but spending tends to reduce in later years.

Want more details? Learn about the NZSA's “Rules of Thumb” here.

*Our Retirement Calculator uses the Life Expectancy Rule to show you how your projected savings could be withdrawn on a weekly basis until you are 90 years old. Check it out here.

** Please note the examples don't take into account any investment growth or inflation offsets.

Other factors to consider

Should I stay invested?

If you leave some or all of your money in KiwiSaver or an investment account after 65, it can continue to grow. Since many retirees live well into their 80s, staying invested can help stretch your savings further.

Should I change funds when I retire?

Reassessing your investment strategy is crucial. You don't need to switch your total savings balance to conservative investments just because you've reached retirement. Ensure your investments align with your retirement timeline and risk tolerance. Use our Fund Selector tool to find the best fund for your needs.

What are the risks of staying invested?

Market volatility can affect your savings, but this risk can be managed. Regular withdrawals (e.g., monthly rather than annual) can help balance market ups and downs. Another strategy is to divide your savings into three "buckets" for short-, medium-, and long-term needs.

The “three buckets” strategy

To tackle liquidity, income, and inflation challenges, the team at Sorted recommend splitting your savings into three categories:

Liquidity (0–3 years): Cash that is easily accessible for short-term needs and emergencies.
Income (4–9 years): Medium-term investments, such as bonds, that generate income.
Growth (10+ years): Long-term investments, like shares, to help combat inflation.

This strategy requires some active management, such as transferring funds from long-term to medium-term or short-term as needed. However, it can help you prepare for decades of retirement and meet your evolving needs.

Plan, review, repeat

Retirement spending isn’t a “set and forget” process. Your needs and circumstances may change, so it’s essential to regularly review and adjust your strategy. With thoughtful planning and regular reviews, you can enjoy the financial security and lifestyle you’ve worked so hard to achieve.

Helpful resources

The information provided and opinions expressed in this post are intended for general guidance only and not personalised to you. These materials do not take into account your particular financial situation or goals and are not financial advice or a recommendation. This post is not intended to convey any guarantees as to the future performance of any of the investment products, asset classes, or capital markets mentioned. Past performance is no guarantee of future performance. Information is current at the time of posting, and subject to change without notice. Simplicity NZ Ltd is the issuer of the Simplicity KiwiSaver Scheme and Investment Funds. For Product Disclosure Statements please visit our website simplicity.kiwi.