[Skip to content]

Sign up for our daily newsletter
The Actuary The magazine of the Institute & Faculty of Actuaries

The decumulation puzzle

Simple rules of thumb can help guide people on how to manage their pension drawdown accounts, says Christine Ormrod



Actuaries in many countries are trying to find consumer-friendly approaches to decumulation decisions. The baby boomer generation is retiring, and more retirement savings are in defined contribution funds than ever before.

As actuaries, we understand that retirees must navigate inflation, investment and longevity risks. Despite encouragement to seek financial advice, not everyone will. 

The Retirement Income Interest Group of the New Zealand Society of Actuaries believes it would be helpful to have an independent, trusted source of information that gives an easy-to-understand, general steer. Little guidance of this kind is available.

However, it could be confusing if there were too much, with contradictory messages on the options and their relative merits. We have addressed this and offer a solution. Our paper was launched in parliament by the commerce and consumer affairs minister, with support from the regulator, the Financial Markets Authority and the Commission for Financial Capability. The key proposals are set out here.

Suitability: A set of Rules of Thumb would be integrated into the different ways people receive information on how to draw income from their retirement fund. 

We identified four rules suitable for a range of retirees (see table below). The ‘suitable for’ descriptions cover the risks that people need to consider and their preferences for taking income, such as how keen they might be to leave an inheritance. Our aim was to encourage retirees to think about their risk preferences without making it too complex.

Consistency: A single set of rules would be incorporated into messages from providers, distributors, commentators and others who communicate with people on decumulation matters. The set would be approved as suitable but not mandated by a relevant body, such as the regulator. Our aim was to avoid the confusion caused by multiple messages.

Versatility: The presentation of the rules would vary depending on the situation, to be consumer friendly and encourage them to be used widely. Examples could include:

  • An information website that simply describes the rules and shows something like the ‘suitable for’ descriptions

  • Educational literature illustrating potential income profiles for a couple of examples, as an invitation to consider more tailored advice

  • A robo-advice website with a calculator that generates income profiles from the rules based on information entered by users.


Table 1

Complementary: These rules need not be a complete solution – they are simple and add to, rather than replace, other sources of advice. Our aim was a useful, reliable steer that engages retirees of modest means.

The four Rules of Thumb are shown in the table, and the charts show examples illustrating two rules. Our full and summary papers provide details and suggested wording for a consumer presentation.

These rules have been tested to be relevant to New Zealanders approaching or in retirement with modest savings. They may not be right for other countries, where retirees are likely to have different priorities, preferences, savings and entitlements to state pensions, while investment returns, tax and regulation will also vary. The unique conditions of New Zealand include:

  • The state-provided pension, New Zealand Superannuation, is practically universal and relatively generous at around $NZ450 a week before tax for a single person (about 44% of the average full-time wage)

  • In international terms, publicly funded healthcare is comprehensive, while income- and asset-tested residential care is available for those assessed as being in need

  • Retirement savings levels are relatively low, coming increasingly from the auto-enrolment, work-based savings scheme KiwiSaver, which started in 2007. The average KiwiSaver balance for near retirees is around $NZ15,000 and we estimate the median balance of those aged 65 will reach $NZ100,000 in inflation-adjusted terms in 25 years’ time (around £56,000). We focused on the needs of retirees with low levels of savings, as that represents the reality in New Zealand today and for some time to come.

  • Retirement savings withdrawals can be taken tax free, as lump sums or income.

  • The annuity market is very limited. There are no guaranteed annuities and only one variable annuity available on the open market.

  • Life expectancy and investment returns have both been among the highest in developed countries.


The process we used in New Zealand to derive these rules can be followed to produce a set appropriate for other countries, even those where the level of retirement savings is generally higher. For example, those with an annuity from other retirement plan(s) should find the Rules of Thumb helpful for a smaller savings pot. The Rules of Thumb appeal as an intuitive, simple way of solving the decumulation puzzle, so have a place alongside other tools and sources of advice.

Download the paper at bit.ly/2yZ4dgZ and a summary at bit.ly/2yXuL2j

Rule 3
Rule 3
Christine Ormrod is convenor of the Retirement Income Interest Group of the New Zealand Society of Actuaries and a director at PwC, New Zealand