You've saved all your life and have a tidy nest egg. Now it's all downhill. How long will that capital last and how can you eke it out? It's a question facing those nearing retirement and the newly retired.
If ever there was a financial conundrum full of Catch 22 situations, it's making that capital last for life. There are economic risks such as inflation and investment risks such as market crashes. Then each family has its own decisions to make. Should the capital be left for the kids or should mum and dad be spending it because they're the ones who worked for it? Why conserve it if it will be eaten up in rest home fees?
Eking out a retirement on limited capital - be that $50,000 or $500,000 - takes much more than just budgeting. People who do make the most of their life savings create comprehensive spend-down plans that cover everything from the number of years they hope to stretch the capital out over, to ways of "right-sizing" their spending, as Campbell Johnstone, financial adviser at Macquarie Private Wealth, says.
Many older people make the mistake of believing they should withdraw their KiwiSaver or other retirements at 65 and put it in the bank to be safe, says Johnstone. They're likely to live at least another 20 years, however, and this is one of the least sensible things they should do. People with typical levels of savings need to get the balance of investing for income and growth correct or the money will dwindle quickly.
The irony is the less capital you have the more conservative you need to be with it. Older people whose capital is dwindling, says Johnstone, can't afford to have too much of it invested in a market - such as equities - that has bad years from time to time. If someone "loses" $100,000 on paper in shares the capital isn't going to recover for five years or more.
Those with lower capital levels who put their investments into conservative assets will need to dip into the capital more quickly, says Johnstone.
Let's say someone has $500,000 of invested assets and needs $20,000 a year to spend over and above New Zealand Super. Invested in a growth-type fund returning 5 per cent a year, the retiree will earn $25,000 to top up super. This is simplistic because it doesn't include tax and fees.
The purpose is to compare with someone earning 2 per cent in a conservative fund or investment on the same $500,000 who will receive $10,000 in income and need to withdraw $10,000 from capital. As the capital dwindles so does the income, and the capital withdrawals get larger each year.
The Catch 22 moment is that you invest conservatively, but as a result your capital is eaten away more quickly.
There is a rough rule of thumb in personal finance that if you withdraw no more than 4 per cent of your capital each year over the long run - which takes into account blip years such as 2008 - and invest the rest for growth, the capital won't be eaten away in an ever-increasing spiral.
But all of this requires that the economy and markets work in a predictable way. Every couple of decades the wheels fall off the system for one reason or another.
Just ask people whose life savings were eaten away by inflation in the 1960s, 70s and 80s. "Inflation is really corrosive for savers," says Shamubeel Eaqub, principal economist at the Institute of Economic Research.
The stock market crash of 1987, the Asian crisis of the 1990s and the global financial crisis of 2008 devastated some older people's finances, says Eaqub.
Those who were well diversified and didn't panic rode the storm.
"If you have been in there for 30 to 40 years your return is positive," he says.
Worst hit were those whose investments were too narrow; for instance, confined to the investment companies that crashed in 1987. Their business was investing and they didn't make or do anything. Many Kiwis thought they were a licence to make money and plunged their life savings into companies that imploded after the crash.
The picture was not dissimilar in 2006-11 when more than 60 finance companies fell like dominoes taking thousands of Kiwis' life savings with them. The few voices who warned of these investments being risky were ignored and older people often thought they were being conservative with their money by investing in finance companies.
There have been other instances of capital being devoured through investment in new-fangled products that turned out to be poor choices at best. Blue Chip's complicated property investment schemes is one example. Another capital-gobbler was the reverse equity mortgages sold in the past 15 years.
Older people borrowed against their homes and the interest payments were capitalised, meaning they were paying interest on interest, which eventually mounts up exponentially.
Russell Hutchinson of Chatswood Consulting makes the point that reverse equity mortgages - which are no longer widely available - should be a last resort for raising money in retirement.
Another investment risk to older people's capital is lending it to the kids or grandchildren for business ventures. Some feel forced into this by relatives - and it will become more common when increasing numbers of KiwiSavers reach the age of 65 and get their payout.
Another legitimate but costly scheme is buying a licence to occupy apartments in retirement villages. These apartments and all the related charges can tear through capital like a speeding bullet.
Inevitably there will be more economic and investment shocks in the future.
We're unlikely to see long periods of high inflation, says Eaqub. The bigger risk for older Kiwis and their capital is a house price shock. Close to 90 per cent of household wealth is in housing, meaning this is the biggest worry for retired New Zealanders and their capital.
There are various ways older people live off their houses. One is simply that it frees them from rent, says Eaqub. Others are downsizing to release capital, or owning rental property.
"By and large since the middle 1970s house prices have trended up [and] there is a belief that house prices will continue to go up." Eaqub points to the United States and Europe, however, where thanks to the financial crisis some people saw huge drops in the capital they had tied up in housing. He won't rule out such housing crashes here.
Some older Americans and Europeans are having to work 10 or 15 years longer to recoup the capital they have lost.
"There has been unprecedented growth in house prices in New Zealand [and] we are betting that house prices will only ever go up," he says.
"That may not be the safest strategy. The lesson from the financial crisis should be very much that [house price crashes] can happen and your portfolio should be diversified."
Johnstone says older people who worry about making their money last should seek fee-based financial advice. This is a one-off where they pay an hourly amount for the advice. It's not a case of transferring their investments to the adviser who then earns commission from them. It can simply involve fact-finding and a plan so that they can manage their own future.
There is more to financial advice than just where to invest. Hutchinson cites the case of one client who, when probed by her financial adviser, found a $100,000 teaching pension that she'd forgotten about.
Not all older people spend their capital too rapidly. Some don't spend enough, adds Hutchinson. "It is slightly bonkers if you are 90, live in a $1 million house and are still healthy enough to travel but [exist] on $18,000 NZ Super a year," says Hutchinson. People in that situation need to be encouraged to spend their capital. "Ultimately it is about life, not the money," he says.
There are ways to make the capital go further. For many people that is to continue working after retirement. Every dollar they earn while still in the workforce replaces the need to make capital withdrawals.