In the wake of his new book, Retirement Ready, well-known financial author Martin Hawes discusses how to approach the golden years in a way that works for you.

I have always known that there would come a time when I would need to live on savings.

I have never thought of this as retirement as such, nor had I made a concrete plan. However, I have always wanted to live with the confidence of having enough if I ever did stop work. I want to be ready for retirement, even if I do not particularly want to be retired.

A few years ago, I had a major review of my finances. I looked at all aspects: family trust, will, housing, insurances, and work. These were things that I had kept a watching brief on for years and so this review was one more in a series.

However, with my advancing years, there were two other things that needed a special, more detailed look: a retirement budget (because you never know) and my investments.

The budget was first: like any budget, this budget was a check that my income would always match or exceed my expenditure – that I had enough.  It was a review to insure that I could move out of work and live the life that I wanted.

Mock budget

This started by doing a mock budget – a look at the cost of my desired lifestyle. This exercise showed that I needed about $90,000 pa to live on and another $20,000 pa for travel (I now go to Europe most years for rock climbing).

I then started on the income side of this equation by ignoring funds from work – I had to assume that for whatever reason this had stopped. The only assured income that I would have was from NZ Super (about $20,000 pa).

Simple arithmetic said I had to take $90,000 pa from my investments. The big question for all of us is do we have enough savings to fund the amount we need?

This comes down to two things: the amount of savings and the amount that we can draw from savings to have them last as long as we do.

I knew how much I had in investments – I have measured that on a weekly basis for years. I just needed to apply a drawdown rate to these savings and see if the matched or exceeded $90,000 pa.

Four per cent rule

The process so far is easy – it is deciding on the drawdown rate that is tricky. In the past many people relied on the 4 per cent rule.

This rule of thumb said that could draw 4 per cent of the starting value of a portfolio and provided that you increased the amount with inflation, and your money was invested in a balanced fund, your investments would last about 30 years.

That would mean that someone who had investments of $500,000 and who started drawing down at age 65 could draw $20,000 pa and would see their money run out age 95.

This has been refined significantly by the New Zealand Society of Actuaries, who have done papers giving various scenarios.

Using one of these and taking account of the fact that I would be starting to draw down well after age 65, I decided that a drawdown of 6 per cent would be appropriate.

That would mean to have my desired income of $90,000 that I would need investments of $1.5 million (which I do have).

My “do I have enough?” question was answered with a “yes”.

Money management

My second question I asked was “who should manage my money”? For nearly 50 years I had managed my own investments, but when I looked at things closely, I realised I was only getting an average performance.

So, why was my investment performance only average? A little hard (and honest) thinking had me own up to not spending enough of my best time on my own investments – my various other roles took precedent. Moreover, I recognised that although I am not a bad buyer of investments, I was nearly always a reluctant seller.

This meant I did not take a profit when it was on offer and held on too long.

I was spending a lot of time, effort, and energy to be average. If I wanted to be a lot better I would have to spend even more of these three commodities – but, at my stage of life, that was a price I was not prepared to pay.

And so, after 50-odd years of managing my own investments, I took a deep breath and handed my money for others to manage. This has proved one of the best investment decisions I have ever made – it has freed up my time and space of mind.

As I write, I am overseas rock climbing. I have watched the market because I am interested, but I have hardly given my own investments a thought since leaving home. I should have given my portfolio’s  management to someone else years ago.

Martin Hawes is a financial writer and presenter. He is not a financial adviser, and the information and opinions here should not be taken as financial advice.