This article was published on 23 April 2011. Some information may be out of date.

Savings growth is far from over at 65

I’m a bit hesitant to pass on this information, for fear that some readers might get the wrong message. But here goes. Just promise me you’ll read past the first half dozen paragraphs, okay?

American research shows that out of all the money someone spends throughout their retirement, only about 10 per cent is money they saved from age 25 to 65 — assuming they saved a fixed percentage of their income through that period. Another 30 per cent, says Don Ezra, an investment strategy expert from Russell Investments, is compounding investment returns on that money up to age 65.

That leaves an astonishing 60 per cent made up of returns earned on the savings during retirement — assuming the money is spent evenly from age 65 to 90, with the amount growing each year to keep up with inflation. “At 65 you’ve got 40 per cent — or at the most half — of what you will draw down,” says Ezra, who was speaking at a recent Workplace Savings NZ breakfast.

In New Zealand, the numbers might be a bit different, because of the KiwiSaver incentives and tax differences. But the over-all situation would be similar — with probably more than half the money accumulated after 65.

That’s not as surprising as it seems. Once you have a relatively large sum it grows fast. For example, if your savings total $200,000 and they earn a return of 6 per cent a year, the total will double to $400,000 in about 12 years, and double again to $800,000 in the following 12 years.

True, in retirement you’ll be withdrawing some money each year, so that will slow the growth a bit. But the compounding is still powerful.

My worry is that people will read this and conclude that they don’t need to save all that much for retirement. The fact is that while we can hope — maybe even expect — our savings to grow a lot after retirement, we still need plenty to fund our spending for, maybe, 25 or more years, especially allowing for inflation.

The key, therefore, is to work out how to invest your savings at retirement to engender all that growth. “What you do with the money at draw-down is vitally important,” says Ezra.

He suggests thinking of your retirement money as being in three zones: money for essentials, lifestyle money, and money to leave to family or charities.

For the essentials, you’re looking at the total sum you will need over and above NZ Super. Ezra suggests that might come to about 20 times the amount you’ll need in your first year of retirement.

If you want a buffer to allow for the fact you might live past 90, you would need more. However, New Zealand experience shows most people who live past 90 find they can manage on NZ Super if they have a mortgage-free home.

How much you want for lifestyle and inheritances is clearly up to you.

Ezra suggests in retirement putting money you expect to spend in the next five years in laddered bonds. That means having some bonds that mature next year, some the year after, and so on. That way, you get a range of interest rates, some of which will turn out to be relatively high.

The rest of the money, he says, should go into shares, as they have a good chance of growing faster than inflation.

I broadly agree. You don’t want to be too conservative in retirement, because you won’t give that powerful growth a chance. Still, I would suggest bonds for the next ten or twelve years, rather than five.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.