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How to make drawdown a success

An update on where New Zealand is with decumulation, as the 2022 Review of Retirement Income Policies sets its sights on the topic.

I’ve previously written about the guidance the Retirement Income Interest Group (RIIG) of the New Zealand Society of Actuaries (NZSA) offers on how to think about drawing down money from KiwiSaver or other retirement savings. RIIG has proposed a set of four Rules of Thumb as illustrative ways to draw down funds, and tested them in a model with current longevity and investment assumptions to illustrate who they would be suitable for:

Rule of Thumb

Most suitable for

6% Rule: Each year, take 6% of the starting value of your retirement savings.

People who want more income at the start of their retirement, to “front-load” their spending, and are not concerned with inheritance.

Inflated 4% Rule: Take 4% of the starting value of your retirement savings, then increase that amount each year with inflation.

People worried about running out of money in retirement or who want to leave some inheritance.

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.

People comfortable with living on other income (for example New Zealand Superannuation) after the set date.

Those wanting to maximise income for most of their life and not concerned with inheritance.

Life Expectancy Rule: Each year take out the current value of your retirement savings divided by the average remaining life expectancy at that time.

Those wanting to maximise income throughout life and not too concerned with inheritance.

The Rules are not forecasts, but a way of considering the pros and cons of how a drawdown approach might work for a retiree with KiwiSaver funds. 

Choosing a Rule is not for ever, as course corrections can be made if there are changes in individual circumstances, new forecasts of future investment returns or updated longevity expectations. The issue is not How much income should I commit to take for the next 25 years or so? but rather, How much income am I comfortable taking for the next year or two until I review? 

Ideally, retirees will at least have an idea of short-term income needs when starting the drawdown process.  Being certain about what income might be needed twenty or thirty years after retiring is not feasible, but retirees should find that thinking through possibilities, with advice if required, will help to clarify what income they should look for from drawdown. Then ongoing reviews can adjust the drawdown amount if necessary.

RIIG’s new paper adds to previous work by describing describes a framework for how to use Rules of Thumb to draw down from KiwiSaver or other retirement savings.  This is a new and difficult problem for many retirees in New Zealand.  It involves risks and uncertainties.  Other countries are finding their way, but there is no obvious best example available. 

RIIG also discuss policies to make drawdown a success, especially important as the  Retirement Commissioner’s triennial review of retirement income policy is taking place in 2022.  We believe that to make drawdown a success for those retirees with some KiwiSaver or other funds, then:

  1. New Zealand Superannuation (NZS) should be retained as a strong foundation, entirely separate from KiwiSaver.  NZS is New Zealand’s public pension.  Unlike in many other countries, NZS is near-universal and not asset- or income-tested.  Drawdown decisions do not change how much NZS is received and are tax-neutral, as tax is paid on money paid into KiwiSaver but not on taking money out.  There are, and will be for the foreseeable future, retirees who choose to spend their modest KiwiSaver in the early “active” phase of retirement, anticipating that they will rely on the relatively generous longevity insurance of NZS later.
  2. Content should be consistent, and shared widely. New Zealand’s National Strategy for Financial Capability state that: “agencies should work together to provide consistent content that demystifies financial topics”.  RIIG called such consistency “critical”.  It means providers, agencies, intermediaries and advisers using one framework to explain drawdown, describing one set of Rules of Thumb, and, referring to one dataset on longevity data.  This still allows for providers to differentiate products but avoids the confusion (and worse, hidden costs) of too much contradictory information.
  3. Standard wording on KiwiSaver statements should be pepped up.   Current regulations require only one method of drawdown to be described on annual KiwiSaver statements: a ‘straight line’ to age 90. Different drawdown strategies and their potential consequences should be explained to encourage consumer choice. The RIIG framework could be a way to do this.
  4. More action could be made if evidence emerges of poor choices being made.  KiwiSaver is still a maturing product, after starting in 2007.  Average account balances are low in international comparisons.  As balances increase, market players and policymakers may look to other countries such as Australia where longevity products are being introduced. New Zealand can wait to learn from overseas, while tracking the size of KiwiSaver balances as they become available to each cohort of retirees, and (as far as can be judged) checking that drawdown decisions are broadly being made sensibly.


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