Gotta get comfortable using capital in retirement
NZ Super won't cut it for retirees and they need to rethink how they fund their golden years.
Saturday, April 22nd 2023, 8:08AM 
1 Comment
Recent inflation figures show a welcome slowdown in the pace of price rises. However, even with the recent lift in NZ Superannuation. rates, retirees still need alternative sources of income to fund a comfortable living standard in retirement.
In most cases, this means gradually drawing down accumulated capital, according to Ralph Stewart, founder and managing director of Lifetime Retirement Income.
Inflation, measured by the consumer price index (CPI), rose 6.7% over the year to end March 2023 according to data released by Stats NZ last week. While heading in the right direction compared to 7.2% in December 2022, it remains at levels not seen in almost three decades.
“For retirees, the devil is in the detail,” Stewart says. He notes that some of our retired population’s biggest expenses have increased by more than double the CPI.
“Retirees spend a chunky portion of their budget on food – up to a fifth of monthly expenditure. And, as reported earlier this week, food prices are up 12.1% year-on-year, fuelled by a 14% jump in grocery food and a staggering 22% for fruit and vegetables.
“For those hoping to enjoy their twilight years in financial comfort, NZ Super simply won’t cut it. It was a stretch in a moderately inflationary environment. Now it’s a pipe dream,” Stewart says.
He notes that retirees who’ve been able to put money aside over their working lives, whether through KiwiSaver or other savings, are clearly more fortunate.
“The tricky bit is working out how to turn a lump sum into a stable, long-term income to supplement NZ Super,” Stewart says.
"For those hoping to enjoy their twilight years in financial comfort, NZ Super simply won’t cut it. - Stewart
“Many look to term deposits for a low-risk return on their capital, or managed funds that focus on income-generating assets like bonds and dividend-paying stocks,” Stewart says.
“Yet, money in the bank isn’t winning the race against inflation either. And even the most conservative investment funds aren’t immune to the ups and downs of financial markets.
“More importantly, they ignore one of the key factors in optimal retirement planning – the judicious drawdown of capital to enhance living standards over the long term.
“Combining a low-volatility investment strategy to grow capital, with the careful, calculated decumulation of that capital over the long-term is the most powerful way to bolster retirement income.
“We must get comfortable with using our capital in retirement to help fund a decent standard of living. This is precisely why we spend decades working hard to save it,” Stewart says.
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The reason people invest in the first place is to take advantage of the power of compounding, but risk is not symmetric and large drawdowns are de-compounding events to be avoided or ameliorated because investors do not have infinite time in which to grow their savings.
Whilst it is impossible to avoid all drawdowns recent research has shown that funds (within the same category) with lower average drawdowns tend to do better over time.