Hitting 65 with a reasonable chunk of savings in your Kiwisaver account should be cause for celebration. But what’s the best way to use those savings to prolong the post-retirement party? Former MJW principal (and actuary), Mark Weaver, goes looking for advice…
I have been a good KiwiSaver.
And my provider hasn’t been too bad either.
But now, on the other side of 65, my focus has switched from saving to spending. More importantly, though, as a lifetime follower of the prudent person rule (financially, at least), I need to make some decisions on how much income my carefully-curated nest egg can sustain for X number of years.
Surely, this moment marks one of those ‘trigger points’ for my KiwiSaver scheme to shoot me over some basic retirement income information.
However, after I transitioned from accumulator to decumulator my provider appears to have gone incommunicado.
To be fair, I did not tick the ‘refer me to an adviser’ box when signing on with my scheme. (Note: I can be difficult to get hold of and taking advice does not come naturally to me.)
Nonetheless, I do recognise the importance of talking the issues through with an objective third-party and would be happy to outline a retirement plan with an adviser.
Constructing a basic plan for my retirement income needs shouldn’t be a time-consuming exercise. And while some advisers may not see the value of such one-off retirement-planning sessions, if all goes well there’s always the chance of expanding the relationship.
For example, in addition to the regular investment issues, some advice on my banking options would be valuable. I have health insurance and home contents insurance which could usefully be reviewed and could mean a reduction in the premium for which the adviser could earn a fee/commission.
But let’s return to what I see as the fundamental information or guidance KiwiSaver schemes could provide to their 65 and up members: I’m not talking about items such as lifestyle, budgeting or other ‘fluffier’ advice concepts but just some simple(ish) number-crunching based solely on my final KiwiSaver balance at retirement.
Here’s what I think that KiwiSaver retirement triage toolkit should contain the following items:
- a format in which to review my financial position and risk-return outlook in a way that reflects the needs of the decumulator. This is essential in helping me determine if I should remain in my current investment fund or turn down the risk dial to reflect the new employment-free paradigm. For example, if I’m in a growth fund, the prudent course may be to switch to a balanced option; or it could be, if I’m already in a moderate balanced fund, no change is required.all probabilty I want to go down by one notch, eg growth to balanced. Either way, this should be a relatively straightforward technical challenge for KiwiSaver providers to overcome;
- a tool to illustrate possible future outcomes based both on the standard assumptions but also replicating some actual outcomes over the last 30 years. I just want to see how changes in the investment environment across a range of scenarios could impact my targeted income level.
But how do I set the initial income level? There are no hard-and-fast rules here.
As a notional example, let’s say my final KiwiSaver balance hit a respectable $350,000.
Assuming I just want to maintain enough income to meet my current needs then maybe 4 per cent per annum is good enough. However, perhaps I need the planning tool to reset the level for the following year contingent on the return for the past year. Such projections, of course, should carry the standard warnings.
Or the tool could also plot the potential value of my final KiwiSaver balance according to assumptions regarding current market conditions.
For instance, as an erstwhile investment consultant (with an actuarial bent) I’m aware that market levels are high and maybe my $350,000 is really only worth $300,000 on a longer-term valuation basis. If that is indeed an accurate portryal of reality then attempting an income of 4 per cent on $350,000 of $14,000 could be a little ambitious.
Under those conditions then maybe it’s better I aim to invest the $300,000, which at 4 per cent per annum produces $12,000 in annual income while keeping the $50,000 as a cash buffer against severe market falls. Of course, I do not need to religiously follow all this but it would be useful for providers to make tools available to help retirees think in these terms about their KiwiSaver balances.
But what other standard information could KiwiSaver schemes offer their retiree members to build a relationship post the magic age of 65? Information on markets, perhaps, not too much, just enough to keep me informed as a retiree.
For all I know, KiwiSaver schemes may view their decumulator members as a short-tail legacy business: after all, unlike the gainfully-employed, retirees are hardly a growth market in terms of feathering the all-important FUM.
But the payoff for KiwiSaver providers in better communicating with and servicing retiree members could be substantial.
KiwiSaver is such a flexible product with many different investment options and a not unreasonable regulatory pressure on fee levels.
The opportunity exists to simplify my investment strategy by transferring all my financial investment assets into my KiwiSaver scheme. Some might argue that I need a second, non KiwiSaver, financial service provider; but others would argue that you get proper diversification through investing in different assets and not different managers..
When people talk about winning the KiwiSaver game is not a key parameter for providers the level of member funds retained at age 66 compared to age 65. If you can retain a fair proportion of your membership base at 66 then there’s a good chance they’ll still be in your scheme at age 70 and beyond.
The Commission for Financial Capability (including it’s well-regarded Sorted website) have committed a lot of resources to helping New Zealanders build better savings and financial management habits. But guiding post-retirees through the maze of income planning is actually a more difficult task than encouraging the under-65 demographic to accumulate via KiwiSaver.
Possiblly, the impending adviser regime reforms may well make it easier for KiwiSaver providers – and other entities – to hit their members with appropriate, objective and useful income-planning information at the point of retirement, and beyond.
In the interim, us decumulators will have to muddle along with our calculators and our thumbs.