Retirement Life
6 December 2023

Stomaching the ups and downs of investing


These are tough times for investors. There are few who enjoy the kind of market volatility we’ve seen over the last couple of years, but it’s particularly hard for retired investors. Retirees who are using their investments to provide a living will get investment returns in time but, as we can see at the moment, those returns will not be constant – market volatility is one of the things that they will have to manage.


Those who are saving long term for retirement can endure volatility knowing that at least when markets are down they’re buying at lower prices, and they can expect good returns from those low-price investments in the future. As they accumulate, they may be uncomfortable with the volatility but at least they will eventually profit from it.


Volatility harder on retirees

However, volatility is no friend of the retired – as they decumulate, retired investors tend to be sellers of investments rather than buyers. They need to make constant withdrawals to fund their living costs, and at the moment they are selling into weakness.


Few people now live solely on the returns from their investments. Our parents’ generation would largely put their savings in term deposits (or other similar investments). They would live off the interest while keeping their capital intact, to be passed on to the children through their wills.


Making it last

Today we have to make our money last longer. Life expectancy for a 65-year old is close to 25 years and over that time inflation will reduce the real value of our income from investments. Moreover, most people want more income than can be derived from term deposits and the like – many retirees are very active and want to do a lot of things that cost. Simply taking investment income is not enough and they need to draw some capital as well.


Calculate what you could draw in retirement.

It is now common for people to draw not just income but to spend a little of their investment capital each year. This means that the value of their investments gradually declines. This is slow at the start but, with constant draw downs, the amount that they have invested reduces faster and faster as time goes on.


Complex calculations

The amount to draw is a difficult, complicated calculation with several factors at play: investment returns, inflation, and life expectancy are the main ones and all are unknown at the start of retirement. It’s an actuary’s job to make calculations using the best assumptions available.


For those without actuarial assistance, there are rules of thumb. For example, the 4% rule says you can draw 4% of your initial investment funds each year, increasing the amount with inflation each year for thirty years (at which time the money will be all gone). While such rules give guidance, finding a safe draw down rate which will prove to be neither too big nor too small is difficult.


The discomfort of decumulation

Drawing capital means watching your account value decline. This is, of course, extremely uncomfortable. The discomfort is increased by volatility – not only is your account balance reduced because you are drawing on your investment capital, but volatility pushes the value of your investments down further. Retired people with investments are hit both ways.


This causes some to cut how much they withdraw – they are frightened into a reduced lifestyle. That is a great shame – people should be having the time of their lives in retirement.


A different perspective on volatility

There are a couple of things you should think about when it comes to volatility. First, when drawdown rates (and the resulting ‘rules of thumb’) are set by actuaries, they assume that there will be volatility. This means that you can continue taking your living costs even through down times like these. Effectively, volatility is built into the models and provided you have set a reasonable drawdown rate and markets do not stay down for years, you ought to be able to draw the same amount through thick and thin.


Second, many retired people hold some cash (bank deposits) for emergencies and to get them through times when markets are down. This cash may used to live on so that you do not have to draw down (i.e sell investments) when times are bad.


A helping hand

There are also organisations whose primary focus is taking care of the complexities of retirement income for retirees who’d rather not think about it at all.


As you might be aware, I’m both a director and shareholder of Lifetime Retirement Income, which manages, among other things, the Lifetime Retirement Income Fund (LRIF). This is a specialist drawdown fund – i.e., it is a fund for retired people to invest their money and receive regular (usually fortnightly) amounts to supplement NZ Super. LRIF’s managers work out each investor’s safe draw down rate, which it reviews annually.


Another of LRIF’s unique features is a “risk overlay”. This means that the fund employs tactics to specifically manage market volatility. This strategy does not remove all the highs and lows, but it does reduce volatility, ensuring a smoother ride for retired investors.

Take the first step towards a successful Retirement!

If you’re keen to learn more about the Lifetime Retirement Income Fund, simply click on the link below for an info pack.


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Written by:

Martin Hawes

Martin Hawes is not a Financial Adviser or a Financial Advice Provider, and the views in this article are not intended to be financial advice. The views and opinions are general in nature, and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. Martin Hawes is a director and shareholder in Lifetime Income.

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