Introduction
Planning for retirement can be overwhelming, especially when it comes to figuring out how much you can safely withdraw from your savings each year without running out of money. This is what we call the Sustainable Withdrawal Rate. In this article, we’ll explore different withdrawal strategies to help you make an informed decision.
How Much Income Do You Need in Retirement?
The first step in retirement planning is understanding how much income you’ll need to maintain your lifestyle. The New Zealand Retirement Expenditure Guidelines provide useful benchmarks:
- No Frills Retirement – Covers only basic necessities with little to no luxuries.
- Choices Retirement – Allows for a more comfortable lifestyle with some luxuries.
According to the latest data:
- A two-person household in a metro area needs around $47,000 per year for a No Frills retirement and about $90,000 per year for a Choices lifestyle.
- A single person requires about $36,000 per year for No Frills and $40,000 per year for a Choices retirement.
Your required income will depend on your unique circumstances and lifestyle preferences, but these figures provide useful reference points.
Understanding Withdrawal Rates
A sustainable withdrawal rate ensures that your savings last throughout retirement. Let’s explore different withdrawal strategies and their implications.
4% Withdrawal Rate
- Suitable for retirement at age 65.
- Withdraw 4% of your initial portfolio annually, adjusting for inflation.
- If you start with $500,000, you withdraw $20,000 per year.
- Works well with a moderate risk portfolio (50% in growth assets, 50% in defensive assets).
Using Monte Carlo projections, we can see how likely the portfolio is to last until age 100. However, market fluctuations could affect longevity, requiring spending adjustments over time.
5% Withdrawal Rate
- Commonly used in New Zealand.
- Withdraw 5% of your initial portfolio per year but with no inflation adjustments.
- With $500,000, you start with $25,000 per year, but inflation reduces purchasing power over time.
- This method aligns with typical retirement spending patterns, where expenses are higher in early retirement and decrease later.
6% Withdrawal Rate
- Suitable for those retiring later (e.g., at age 70).
- Withdraw 6% per year, with no inflation adjustments.
- With $500,000, this provides $30,000 per year.
- The portfolio may last into your late 90s, but higher withdrawal rates increase the risk of running out of money earlier.
2% Withdrawal Rate
- Ideal for those wanting to preserve capital for future generations.
- Withdraw only 2% per year to maintain the real value of assets.
- With $500,000, you withdraw $10,000 per year.
- Requires double the assets compared to the 4% method, but offers financial security.
Choosing the Right Approach
Each withdrawal strategy comes with trade-offs. The right approach depends on:
- Your desired lifestyle and spending patterns.
- Your risk tolerance and investment strategy.
- Your willingness to adjust spending over time.
Summary of Withdrawal Methods:
| Withdrawal Rate | Initial Income (on $500,000) | Adjusted for Inflation? |
|---|---|---|
| 2% | $10,000 | Yes |
| 4% | $20,000 | Yes |
| 5% | $25,000 | No |
| 6% | $30,000 | No |
Key Takeaway: Withdrawing too aggressively can lead to running out of money, while withdrawing too conservatively may mean not fully enjoying your retirement.
Final Thoughts
A well-planned retirement should incorporate a mix of NZ Super, KiwiSaver, and other investments to meet your financial needs. Retirement is a journey, and your withdrawal strategy should be reviewed regularly to adapt to changing circumstances.
If you need expert advice on investment strategies or moving to New Zealand, check out our other videos on our YouTube channel or visit our website: www.pacificwealth.co.nz.
📢 Have questions? Feel free to reach out to our team for personalized guidance.
Thank you for reading!
