You can't afford to miscalculate retirement savings

Did you hear about the two actuaries who went duck shooting this week?

They saw a duck in the air and both fired a shot. The first was 10m wide to the left and the second 10m wide to the right. They gave each other a high five, because on average they shot it.

It's an oldie but a goodie and a prime example of theory being better than reality. On average they ate no dinner.

Last week the New Zealand Society of Actuaries released a report where nothing got harmed in the calculations, but the duck got away again.

They've come up with some rules of thumb in the "decumulation" phase of retirement, also known as the "spend-it" years.

How much of your nest egg do you use each year to make it last the distance?

The answer is to withdraw 6 per cent a year, if you're happy not to worry about inflation or leaving an inheritance. It's 4 per cent a year if you want to add on inflation and leave some money behind.

Two other methods use a fixed date or a life expectancy model.

The Financial Markets Authority is being asked to approve a rule-of-thumb, so banks, fund-managers and commentators can use it as a broad steer where full financial advice isn't being taken. On that level I totally agree with them – no one will die in its application and it's a fabulous way to get people saving more.

If you know the 6 per cent rule, you don't have to be a whizz-kid to work out $500,000 in your KiwiSaver will roughly give $30,000 a year on top of government superannuation. If that's not enough to keep you in the manner you envisaged, then self-rescue is easier now than later.

Theoretical not practical

Should a 65-year old use the rule-of- thumb in a practical sense? Never, in my opinion. That may sound a little dramatic since I've already said it won't kill you, but the detail of the report "Decumulation options in the New Zealand Market" clearly shows the issues.

The biggest snag is that everyone invests their money in different ways.

Some will use deposits, others in conservative or balanced portfolios.

From age 65, large parts of your nest egg still have a 20 to 30-year time horizon so there is a valid reason to remain in equities. This spectrum doesn't work in a rule-of-thumb, so those using it will fail to get enough quack from their retirement duck.

The actuaries tested eight different investment outcomes for 65-year old men and women. Many of these resulted in 30 to 50 per cent of their capital being intact at the pearly gates. Yet the 6 per cent rule is for people who want to use up their capital. You're probably giving the kids your house and whoopsie, here's another $250,000 from our $500,000 portfolio we failed to use.

That's a blooming big whoopsie to my mind. You only have one retirement and one opportunity to live it. Where is the joy in taking that last breath and realising you denied yourself years of European holidays, meals out, or more flights to see the grandchildren? You can't push the rewind button.

I went through this exercise a few weeks ago with my financial adviser.

The models required are fairly chunky with extensive back-testing of random investment returns to build a probability picture. I wanted to see what income we could produce, while fully depleting capital.

We did the obvious things like twiddling between a 60/40 and 70/30 equity-bond portfolios. We modelled different life expectancies and experimented with a flat inflation-adjusted income and one that stepped down with each decade. It was further personalised by fictitiously selling a home in the UK and downsizing a New Zealand home, replacing cars and taking holidays.

Future cashflows were pre-modelled into the income level, taking away all the mental gymnastics. The probability of under or over-shooting is calculated and when I didn't like the result, all the moving parts were tweaked until the risks were acceptable. Each year it can be tracked and remodelled if the expected flight path differs.

The exercise proved my income could be vastly different to a one-size-fits-all model. The impact on lifestyle and happiness was far reaching.

When you arrive at your desired retirement age, remember you're an individual, not a statistic. Aim to blast that duck out of the sky. You owe it to yourself and your spouse to take proper financial advice with annual monitoring and adjustments.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.