No opposing thumbs needed: four retirement income rules

The NZ Society of Actuaries (NZSA) proposed retirement income ‘rules of thumb’ would need universal buy-in from industry, government and regulators to succeed, according to the launch report released last Thursday in a session hosted in Parliament by newly-appointed Commerce Minister, Jacqui Dean.

“We note that it would be confusing to retirees if they were offered several different Rules of Thumb from different sources and this would result in the Rules not being normalised,” the NZSA report says. “It follows that for Rules of Thumb to be successful, a consistent set of relevant, reliable, approved Rule(s) should be integrated into the different ways people seek guidance or receive influencing comment or calls to action.”

The NZSA report – prepared by its Retirement Income Group (RIG) – says the four-rule standard would assume more gravitas if the Financial Markets Authority (FMA) endorsed, maintained and distributed it “for widespread use”.

“By virtue of being simple, Rules of Thumb add to the range of other messages and advice or guidance available and do not replace them,” the report says. “The ‘approved’ set would be available to be integrated into messages so their use would be the choice of providers, distributors, regulators, commentators and others who communicate with New Zealanders on decumulation matters.”

While the report says the rules were based on robust methodology they should remain open to “further testing and review” from other parties as well as the NZSA. From an original set of eight, the NZSA sliced the rules of thumb in half after considering “consumer preferences”.

The rules themselves lay out a range of broad nest-egg management strategies for retirees to consider, namely:

  • 6 per cent Rule: Each year, take 6 per cent of the starting value of your retirement savings;
  • Inflated 4 per cent Rule: Take 4 per cent of the starting value of your retirement savings, then increase that amount each year with inflation;
  • Fixed Date Rule: Run your retirement savings down over the period to a set date – each year take out the current value of your retirement savings divided by the number of years left to that date;
  • Life Expectancy Rule: Each year take out the current value of your retirement savings divided by the average remaining life expectancy at that time.

According to the NZSA study, many NZ retirees would benefit from a rules-based “broad steer” in managing retirement assets during the complex decumulation phase as their, on average, modest savings would not typically support paid financial advice.

The savings drawdown period is more difficult to negotiate than the accumulation phase, the NZSA report says, due to several factors, including: the reduced ability to recover from “bad luck” or errors later in life; poorly-understood longevity and investment risks; and, the wide variety of individual retirement starting points, “objectives, preferences and ambitions”.

“Rules of Thumb fit with the search for simpler ways of giving advice to a broad range of people, including robo-advice and the thrust of proposed changes to the Financial Advisers Act 2008,” the report says.

Such widely-adopted standards also fit with behavioural finance research that showed the benefits of ‘nudging’ people towards taking action on difficult financial decisions.

The NZSA study lays out a range of retirement income scenarios for the four rules based on individuals starting at age 65 with a $100,000 KiwiSaver balance based on the usual actuarial assumptions around mortality, inflation and investment returns.

Based on earlier work by the NZSA and others, the latest four-rule paper “represents the collective personal views of the members of the Retirement Income Interest Group of the New Zealand Society of Actuaries, and does not represent the positions of their employers or all members of the New Zealand Society of Actuaries”, the report says.

The ‘Decumulation Options in the New Zealand Market: How Rules of Thumb can help’ authors include: Alison O’Connell, Catherine Edgar, Christine Ormrod (Convenor), Daniel Mussett, Joe Benbow and Kelvin Prisk.

– David Chaplin, Investment News NZ