Most of us are worried about running out of money in retirement, but some people are so worried, they end up with too much money when they die.  

By underspending in retirement, you could be cheating yourself of years of fun and joy. But how can you manage your money so that you have just enough and no more?

Rob Glasgow, a wealth adviser at Pie Funds, says the problem of dying with too much money in the bank is more widespread than many people think.

He says financial advisers sometimes beg clients to relax, spend more of their nest-egg – and enjoy their money.

“Typically, fear is the main driver of people dying with too much in the bank,” he says.

“Obviously, you’d prefer to end up with too much, rather than having nothing in your final years. Not having enough creates a lot of stress and hardship – but neither is ideal.”

The greatest fear for nearly half of people was outliving their savings and investments, a US survey shows. The fear of outliving their money was greater than their fear of dying.

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People are worried

The survey showed that is a big factor in decision-making. This fear means people often keep working longer than they need to, out of worry. Some people take excessive risks, believing they need to ‘catch up’.

“It’s almost impossible to time everything perfectly,” says Glasgow. “The length of lifetimes is unpredictable, and so are investment markets, therefore your future balance of savings is unpredictable too.”

By over-saving or working beyond retirement age, many people miss out on quality family time. They could enjoy a more comfortable lifestyle, holidays, home improvements, a new car, flying business class instead of economy, or staying in better hotels.

So, when you don’t know how long you’ll live, how do you overcome this?

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Draw down some capital

Most people retire with a lump sum. Investment returns from the lump sum can become a regular income, sometimes called passive income.

A common method used to regulate retirement income is to draw down a portion of those investments each year, rather than just relying on investment returns, says Glasgow.

Remember, if you do this, you’ll be reducing the future earning capacity of your investments over time, because your overall capital is shrinking.

A good financial adviser can help you project your financial position over time. They can show you the impact of how much you’re drawing out, depending on the investments you hold and their risk – growth versus income.

The 4 per cent rule

A common theory worldwide is the 4 per cent rule: you can safely withdraw 4 per cent from your portfolio every year, adjusted for inflation. Even if you get poor returns, you shouldn’t run out of money over a 30-year retirement.

Glasgow says your returns depend on the risk level and quality of your investments. Your spending in retirement – which could be higher than 3 or 4 per cent – also depends on whether you’re comfortable drawing from your lump sum, as well as income.

The bucket approach

Some advisers suggest three buckets, or piles of money, for different stages of retirement.

  • Early retirement – money you’ll use when you first retire (cash and term deposits)
  • Mid-retirement – money for the next stage of your retirement (balanced fund)
  • End-of-life decade (growth investments)

This gives you permission to spend a portion without touching your future income.

Glasgow warns this approach can add complexity and cost more. Several investment strategies must be monitored and managed separately, which may increase your fees and administration costs.

“You can achieve your objectives with a simpler approach, making sure your portfolio has the right level of risk and return, with a good mix of growth versus defensive holdings.

“I always recommend keeping a good level of cash aside each year to cover your short-term expenses and any emergencies.”

A financial adviser can help by telling you when to spend (and when not to), says Glasgow.

They can help you work out what level of risk is best for you.

So, you’ve ended up with too much?

If you’ve over-saved and find yourself with more money than you need, what could you do?

You can give to charity, or to family and friends while you’re alive to enjoy helping your loved ones and good causes, rather than leaving a legacy.

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Published 20 August 2019

Story by Brenda Ward, JUNO

Rob Glasgow is a wealth adviser and an authorised financial adviser at Pie Funds. You can access his disclosure statement free of charge at www.piefunds.co.nz. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with a financial adviser. All content is correct at time of publication date.