8 December 2021
Retirement Income Projections are Misleading
As the migration out of the workforce into retirement gathers momentum, the importance of understanding the differences between saving for retirement and spending in retirement becomes all important.
Ralph Stewart, Founder and Managing Director of Lifetime Retirement Income believes the savings industry is slow to support the transition from saving to spending in retirement.
“There is no doubt KiwiSaver is a tremendous platform for saving for retirement, sadly, little attention is paid to applying the savings to life in retirement. The newly retired have the potential for a drawdown period which could be almost as long as the time they spent saving for retirement. For many retirees, at least 25 years in retirement is a reality. An investment mistake early in retirement, or a poorly projected retirement income, will have serious consequences as there is no opportunity to replace the lost savings.”
Under regulation KiwiSaver providers are required to provide their customers with a simplistic retirement income projection based on a single investment return, single tax rate and the assumption all New Zealanders have the same life expectancy of age 90. This is basic and may well prove to be misleading for many of today’s retirement savers.”
The New Zealand Society of Actuaries, Retirement Income Interest Group (RIIG) have recently published a paper arguing the current fragmented approach to modelling future retirement income levels is flawed.
According to the RIIG paper, an industry-wide approach to describing retirement income strategies would:
- encourage KiwiSaver members to consider drawdown options over different longevity assumptions – such as to age 90, 95 and 100;
- ensure provider information was based on the most recent longevity and other data (including economic variables); and,
- illustrate several asset drawdown “strategies and consequences” based on different rules-of-thumb as opposed to the linear income modelling to age 90 option “currently in regulations”.
Morningstar Research, a respected and reliable source of independent investment analysis world-wide, noted in their State of Retirement Income – Safe Withdrawal Rates, Nov 2021, the fundamental conventions that underlie drawdown calculations in retirement:
- “A time horizon that exceeds most retirees’ expected life spans;
- Fully adjusting all withdrawals for the effect of inflation;
- A fixed withdrawal schedule that does not react to changes in the investment markets;
- A high projected success rate for the plan (90%).”
Morningstar added, “It seems there is little question that current conditions demand greater forethought and planning than in the past, when lower valuations and loftier yields paved the way to higher future returns. Given this, many of today’s retirees will have to be more resourceful to support their income needs.”
Stewart said, “Calculating a reliable retirement income that will last a lifetime is deeply personal and anything but static or linear. Every saver in retirement deserves a dynamic personal projection that identifies their individual circumstances. This in turn should be regularly reviewed and recalculated to maintain accuracy and relevance.
The saving industry manages assets to support the accumulation of savings while working. The emerging retirement income industry does the opposite, it helps retirees spend their savings over their retirement lives with confidence. It’s time to recognise the difference.”