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Summer KiwiSaver's Martin Hawes has a helpful guide to figure out how much you will need for a good retirement. Some idea of a retirement savings goal is a lot better than no idea at all

Summer KiwiSaver's Martin Hawes has a helpful guide to figure out how much you will need for a good retirement. Some idea of a retirement savings goal is a lot better than no idea at all

By Martin Hawes*

How much savings do you need to fund a good retirement?

This is the time of year that many people confirm their goals and calculating a figure for retirement is probably the most important goal you can set. It seems that if we do not know what figure is right, and a means for working out that figure, we can’t set a goal – and goalless saving has always seemed a bit pointless to me.

The average KiwiSaver balance is $20,000. No-one needs their calculator to tell them that this is not enough to fund a decent retirement. There are, of course, many who have balances higher than this; some are much higher. However, with KiwiSaver only 12 years old, most people have relatively small balances.

This will change: balances will grow and, in time, KiwiSaver accounts will be one of many people’s biggest asset. With bigger balances, most will plan to use their funds to give income for retirement.

However, that still begs some questions: how much do you need? What can you safely draw each year from your investments to spend?

Enter the rule of 4%. This rule of thumb says that you can draw 4% from a portfolio in the first year and then increase your drawings each year to adjust for inflation. If you do this the investments will last 30 years. (It lasts 30 years because the rule assumes that your investment returns are less than your drawings and so you are drawing capital as well as investment returns – i.e. nothing will be left for the kids).

For example, a couple has $100,000 invested in a balanced fund. In their first year of retirement, they can draw $4,000; in the second year they draw $4,000 plus a little more for inflation; in the third year they draw plus a bit more still to account for another year’s inflation, and so on … If they both die at age 95, their money should have run out and the cheque to the undertaker will bounce.

It is important to note that the money needs to be properly invested, not just held in Term Deposits. The 4% rule assumes that you invest your funds in a balanced portfolio (50% in shares and property and 50% in bonds and cash).

 You can do this through a managed fund and many retirees will now use KiwiSaver because on reaching age 65, they can draw down at will from their KiwiSaver fund. In fact, KiwiSaver is now increasingly used by over 65s who are not using it to save for retirement but as their investment vehicle in retirement.

The 4% rule was first proposed by a US Financial Planner William Bengen in 1994 and ever since it has been controversial. Some people say it is too conservative (you should spend more) while others say it is too aggressive (the money is likely to run out before you do).

Although I would not set my watch by the expectation of the money running out in 30 years, I do think the 4% rule is a reasonable planning tool. A couple who know how much income they want can quickly use the reciprocal of 4% (which is 25) to determine how much investment savings they will need.

For example, a couple knows that they want $50,000 each year to live well in retirement. They know that they will get $30,000 p.a. from NZ Super but they will need to meet the $20,000 p.a. shortfall from funds they have invested. If they want to know how much they will need they simply multiply the $20,000 by 25 and find that they need to get their KiwiSaver accounts and other savings to $500,000.

Drawing 4% from a balanced fund gives too main risks. First is longevity risk; the rule could prove wrong and the money runs out before you do. This would probably be because over the time that the couple was retired, investment returns were poor.

Longevity risk is one of the most deep-seated fears for retirees – no one wants to spend their last year of retirement living on wine biscuits and used tea bags.

The second risk is sequencing risk. We know that a balanced fund will show volatility – there will be ups and downs. Sequencing risk is the worry that the downs come early on in retirement when the fund has a lot of money and you are drawing from it.

Although you would expect markets to recover, while waiting for the markets to recover you need to continue to draw your living expense from the portfolio. This means that the money that was withdrawn is gone and the recovery, when it comes, is not applied it.

Both longevity risk and sequencing risk are big concerns for those drawing down on their savings in retirement. Although most people will not use the terms, they are risks that are understood intuitively and these risk are one of the reasons that Annuities are gaining popularity (this is a story that I will tell at some point in the future).

In the meantime, if you are doing some financial planning over the holidays and trying to work out how much you need to save for retirement, the 4% rule is a tool that you should use. If you multiply the income that you want by 25, you will get a figure that will give you some idea of what you will need - and that seems a lot better to me than no idea at all.

*Martin Hawes is the Chair of the Summer Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd and a Product Disclosure statement is available on request. Martin is an Authorised Financial Adviser and a Disclosure Statements is available on request and free of charge at This article is general in nature and not personalised advice. Summer competes with banks and other KiwiSaver providers.

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Nice article. I didn't know the 4% draw-down rate people recommend allowed for increases for inflation.

One note about the final rule-of-thumb, "needed earnings times 25": That's another place to think about inflation. If you're 35 years away from retirement and think you need $X (in today's dollars) per year to retire, that'll likely be $2X at retirement.

Personal observation:
3.5X in your illustration. I reckon you 'enough' for every 10 years you think you have left to go.

If you believe in some particular inflation rate you can use the "rule of seventyish" -- divide 70 (or was it 72?) by the inflation rate in percent-per-year, and you get roughly the number of years to double. So 10 years means 7ish%, 35 years means 2%.

Of course, *taste-inflation* is another matter. As a student I could imagine living in less comfort in retirement than I'd accept now, so all those old estimates need to be updated for that too. (And maybe current estimates will need to be updated for the same reason in the future.)

I always learnt it as the rule of 72, not that it makes that much difference in accuracy compare to 70, but it is much more easily divisible (has more factors).

Yes, you are right. Even with relatively low inflation, $1 will not buy as much as now (maybe not anything!)

And how much will 500,000 buy?

if you are 35 years away from retirement then a one way ticket to australia could be your best investment for a better future.

Why? Is the grass greener?

Straya's on fire

What happens when the equities market collapses and your fund loses 40% of its value while in the mean time any part of your investment in "safe" assets is earning just 1% per annum after tax (or zero under ZIRP), and anything you had in a Bank TD took a haircut because the Bank failed as well when the mortgages it had invested your money in also had a high failure rate.

If that happens early in retirement you have trouble; if it happens late, it is not so bad. The 45 rule does not come with a guarantee that all will be well - it just gives an indication of a reasonable drawdown rate under most circumstances

Have a good amount in kiwibonds is my advice. 1percent interest is not so far behind term deposits these days.

A good chunk of one’s wealth invested in property (owning the home you live in, plus a properly maintained rental) is a good recipe for a financially secure retirement.


Perhaps the key aspects to consider are:
You keep 50/50 balance between cash/bonds, and equities,
How long does a typical collapse take to recover from.

Because when there is a collapse, you should view the equities as going 'on sale' and your 50/50 split means you start buying more of them, turbo charging your investment along with the expected recovery.

(And if the recovery never comes, just join the bread queues along with everyone else)

There seems to be an assumption that capital will not be needed for other things. Some retirees are already finding that buying into a nice, full-service retirement village costs more than they get for their pre-retirement dwelling. Hopefully this will be the last such investment they have to make but it needs to be considered.

Longevity risk is overstated. The money is far more useful for younger retirees in their 60s and 70s who can stay active and travel etc. May as well focus on spending then

In your 90s you will be sitting on your couch dribbling and no amount of money will really add to your lifestyle.

In your 90s you’ll be spending $8k a month on in-room care in the medical wing of the rest home, so you might need more than you planned.

... I know a few people well into their 90's who live alone in their own home .... happily independent ...

A combination of choosing your parents wisely , exercise and good diet , plenty of friends & interests ...

... getting really old isn't necessarily a bad thing ... it is what you make of it ...

Indeed, dear old grandma lived independently until her last week or two. 95years old. Not a bad innings after 6 kids and 50+ years of smoking.

What a gamble! But I suppose for most of her smoking career it was not seen as being a suicidal activity.

sounds like you'll be eligible for voluntary euthanasia. why not save a few thousand dollars and go out like a pro.

Rest homes are the enemy of the elderly.

Their owners/operators are out there to screw you........


Yes, the figures do show that expenditure often falls from late seventies. It may rise again as you require more support and care. Many people under-spend early on in retirement - but watching the amount in your account fall is a very uncomfortable feeling for most

Hey Martin : enjoyed your articles this year... and listening to Joan's investing slot on Radio National :

Merry Christmas to you both , & a happy New Year : Gummy ...

The Trinity Study looked at market movement since 1921, and calculated a Safe Withdrawal Rate for every 30 year period, year by year from then. It calculated a rate you could withdraw at, after inflation, and preserve capital, and showed that 4% was a level that allowed an investor could withdraw (based on the US market) at and preserve capital. That’s how the term “4% rule” is typically used as I understand it.

A big take out is that the 4% needs to cover management fees, which the funds management industry does a good job of obscuring, but which may add up to almost half the 4%. That’s a key and greatly underrated issue in both saving for and living from investments in retirement.

This link sets out the background in plain American.

Excellent clarification Dave, kiwisaver fees are very high and need to be accounted for. That is a key difference between here and US. Good link to MMM :)

"If millennials want to retire at 65 and have enough to live off even half of their final salary in retirement, for example, they would need to save 40% of their income over the next 30 years if investments return less than 3%, according to recent academic research from Olivia S. Mitchell, a professor and executive director of Wharton’s Pension Research Council at the University of Pennsylvania."

It is all very well looking forward to retirement with a good balance in KiwiSaver.
Personally the far safer option is to own your own home and several unencumbered rental properties and that will give you peace of mind!
Property is going to have a very good year in most cities in 2020 with my pick bring Christchurch.

I’m currently in Christchurch for Christmas. Certainly spoiled for choice when it comes to properties/sections to buy! These sorts of supply and demand metrics are not ideal for those seeking to buy and hold for capital gains but at least yields aren’t dropping (thanks to lack of capital gains). Merry Christmas!

Yes the landlords in Christchurch have certainly let themselves and their families down. They only had to buy in Dunedin to get some decent returns. But doing that would have taken them out of their comfort zone and grumpy old boomers find that hard to do.

I couldn't think of anything worse than having a rental portfolio when I'm retired lol.
A well managed stocks portfolio will let you sleep easy at night.
No need to worry about the hassle of tenants, real estate agents, not to mention their slice of the pie, government interference etc etc.
I do agree about owning your own home though.

Agree a well balanced stock portfolio requires little or no work to manage (apart from regular research and keeping ahead of the news). Investment in a business is my preference. Negative yeilds propertys are now not tax deductable.., I think some rentlords may be in for a shock on their next tax return.


My grandfather had a “well managed stocks portfolio” in 1987 ....... but it didn’t help him to sleep easy at night.

Remember that property isn’t subject to the volatility of stocks. Well located property has a stellar track record - which is unmatched by stocks.


Tell that to the landlords in Christchurch. You need both property and equities. Those who hark back to the 87 crash have missed out on massive gains in equities. Dow at all time record high today.


There were plenty of stocks that performed during that time, and many are still going strong now!

Well picked stocks can match property, and you also don't have the hassle and cons of owning a rental.

Days to the General Election: 24
See Party Policies here. Party Lists here.