Maybe you dream of giving up work to sit in a deckchair with a cocktail in hand. You’ll be carefree because in the background, your living costs are paid by investment returns from your nest-egg.

But it might not be that easy.

Having a lump sum invested that earns money to fund your lifestyle of the future is why you’re investing, right?

But wealth adviser Simon Hepple of Pie Funds says with today’s interest rates and volatile markets, if you’re just relying on an income from the returns on your investments, you’re going to be in for a rude shock.

So, tomorrow’s retirees are going to have to crack into that nest-egg – or get creative when they decumulate, say the experts.

What is decumulating?

Well, decumulating is just the opposite of ‘accumulating’, says Associate Professor Claire Matthews of Massey University. It’s spending instead of saving.

“Throughout your working life, you accumulate funds into your retirement savings and build up a balance which will be available to you,” she says.

“Then during retirement, you use up that balance, which is the ‘decumulation’ process. It’s simply about using the capital that you’ve accumulated to fund the retirement that you were hoping for.”

How much will I need?

The best way to work out how much you need to live on in retirement is to look at how you live now and how others live, says Matthews.

“That’s why we produced the Massey Retirement Expenditure Guidelines, to work out what Kiwi retirees are actually spending.”

The guidelines can be found online at Massey.ac.nz. There you can see roughly what the average retiree spends, in the city or the provinces.

If you’re a Kiwi you’re going to get NZ Super, which is currently NZ$34,955 a year for couples or single NZ$22,721 a year. Those rates are after tax at tax code M.

Here’s the bad news. For most people, that won’t be enough money to live on.

“Then you say, well, what kind of retirement do I really want? What are the things I need to spend money on? What is it going to cost me? And then this leads to how much will I need?”

Hepple says he finds most people spend about 15 to 20 per cent less retired than they do working. If you’re currently spending, say, NZ$80,000, in retirement that might drop to about NZ$68,000.

Hepple says he’s found that for a couple going into retirement, NZ$60,000-NZ$70,000 a year is about the average for people to live off. That’s NZ$1,153-NZ$1,346 a week.

“Some need as high as a quarter of a million, and some are able to live off the smell of an oily rag.”

How do I get the nest-egg?

Save: If you’re a committed saver and live a frugal life, you could build up a nest-egg from the money you’ve put aside all your working life. But that’s the slow way to earn it.

Shares, bonds, fixed interest, managed funds, KiwiSaver: We call these things ‘the financial markets’. Massey University researcher Sandra Xu calls this ‘the engine to drive an individual’s net wealth’. She’s working on research showing retirees who invest in the financial markets boost their financial wellbeing through a 24 per cent increase in their annualised net wealth.

Buy a house and pay it off: Keep living costs down by having no rent or mortgage. Your home might go up in value, and you might be able to downsize to a smaller home and pocket the difference.

Buy a rental property (or two): Same deal – the value goes up and you can sell it. Or even better, you can use the rental returns as an income when you retire.

Get a reverse mortgage: If you own your home and are older than 60, you could release some cash from it using a reverse mortgage.

Forests, property syndicates, horticulture or farm schemes: You can join others in investment pools that give you a return regularly or as a one-off at harvest time.

Buying a business: You win several ways – by buying yourself an income, being your own boss and then selling it when you retire.

Just keep on working: You could do this part-time or fulltime, while your nest-egg keeps earning for you.

Get it all together

One of the first problems Hepple says he strikes when he’s advising a client is getting their assets together.

“One of the big problems that I’ve come across with investors is that they have assets scattered all over the place – and sometimes, the world. They don’t know for the life of them where everything is.

“There could be shares they got from issues a long while ago or some pensions they may have from abroad. It makes absolutely no sense keeping assets overseas with a pension provider when you can bring it back to New Zealand.”

Cracking that nest-egg

Many people would love to live off their investment earnings alone and leave their nest-egg intact, but these days it’s just not feasible, say the experts.

Hepple says: “I’m now actively encouraging clients to start eating into their capital because there’s nothing worse than having a million-dollar portfolio and just wanting to keep your million dollars intact by trying to be frugal.

“You’re better off to start drawing down your capital and using it in retirement. No one knows how long they’re going to live, but it wouldn’t be the end of the world to be using, say, NZ$20,000 or NZ$30,000 a year from income, and then maybe taking NZ$20,000 to NZ$30,000 a year in capital.

“That would still last quite a long time.”

Matthews says the concept of decumulation assumes that you’re going to consume your capital over your retirement.

“The only reason not to decumulate is because you want to leave an inheritance or donate to your favourite charity.

“If you don’t have that goal, then yes, you should be consuming your capital – because you can’t use it when you’re gone.”

What about the future?

Matthews says Kiwi retirees seem to be doing OK.

“I’m a little cautious because we’re talking of Baby Boomers and older, and we’re starting to see changes as time progresses and as we get into a different generation.

“Most Baby Boomers own their own homes, generally without a mortgage, but there are lower levels of home ownership in the coming generations.

“This will influence what people’s retirement looks like.”