Spending your savings

The main reason you have saved for retirement is so you can spend your savings in retirement. You will want to protect the full value of your savings. But you also want to earn a good return on your investments, be able to choose the best time to sell them and have cash at hand when you need it.

One approach to managing and protecting your nest egg is to break it down into three 'windows' of spending - the next three years, 3 - 9 years and 9 years +. You can then choose investments based on these time periods. Here's an example of how it works:

Next 3 years

Invest your expected living expenses for the next three years in cash investments, such as savings accounts that earn a regular, fixed return and carry little risk so your money is readily available.

3 - 9 years

Invest your expected living expenses that are 3 - 9 years away in fixed interest investments, such as bonds, debentures and term deposits. Hold these investments until maturity (when the amount you invested is due to be paid back). That way you won't have to worry about the impact of changing market interest rates, and the effect those have on changing capital values. If you hold the investment until maturity you can expect to get the return promised on that investment and your money back at the end. For this part of your strategy, you need to be reasonably sure your money will be there because you will need it for your living expenses in the not-too-distant future.

9 years +

Invest your expected living expenses that are more than nine years away in longer-term investments such as property or shares. We suggest you look at the normally higher returns these provide, including the potential for growth in their capital value. Gauge how comfortable you are with the idea that if markets go down you may need to wait some time for the value of these assets to recover. Think about this part of your nest egg as being in assets that you don't need to sell in the next nine years.

If you decide to adopt this strategy you need to regularly review your investments to make sure your spending matches your available resources. You'll want to aim for a steady migration from the 'longer-term' window through the 'medium-term' window and into the 'current' spending window. From 'growth' assets, such as property and shares for example, through bonds and into cash as you get ready to spend that part of your nest egg.

Your mix of investments will depend on how far through retirement you are, your willingness to take on risk and how much you rely on your money to pay for your basic living expenses. If you need the money just for extras, like overseas travel, you may choose to continue to invest in 'growth assets' - the consequences of a poor return may mean a trip to Sydney rather than one to Los Angeles. It's not quite the same if your nest egg is needed for food, rates or insurance costs or even to replace your car or a worn-out washing machine.

Now, read about returns versus volatility or your investment strategy. Or select another topic by using the main navigation on the left.