Working Paper 01/13 Assuring retirement income

Author: Tom Berthold

This paper addresses the problem of decumulation of savings in retirement. The decumulation problem is how to secure and draw down our retirement savings so as to maintain our relative standard of living, without running out of money.

As people retire with increasingly large lump sums from KiwiSaver, they face the problem of how to manage their savings in a context of uncertainty about the security of investments, future inflation, and their own longevity.

The paper discusses: risks and their optimal allocation; investment options for retirement income; and three options to manage risks to individuals and to the government:

• allow superannuitants to defer their New Zealand Superannuation (NZS) in exchange for a higher rate of NZS later
• allow superannuitants to buy a higher rate of NZS than their ordinary entitlement
• set up a public annuity fund to accept contributions from eligible persons and pay annuities to them.

The paper discusses advantages and disadvantages of each option and finds in favour of the third one.