Your savings are peddling a tidy income and the pensioner peloton cruises in an orderly fashion. In the past it wasn't too difficult to secure deposit rates of 5 to 7 per cent without braking.
A head wind develops. Cadence begins to slow as deposit rates creep down. It's no big deal, you'll just have to survive on oxygen levels of 4 to 5 per cent and push harder. You tinker with the bike, buy a lighter brand and slide down the credit-rating scale. Switch to oval chain rings for tax efficiency and your deposits become PIE-funds.
After reaching granny-gear years ago, the grey haired peloton are worn out. Earning income begins to feel like the final climb of the Tour de France. The heart rate torture of Col de Joux Plane awaits. The bikes pile up and interest rates crash in a heap. Income levels after basic rate tax have dwindled to 2 to 3 per cent.
Look at what's on offer: On a 17.5 per cent tax rate, Westpac, Rabo and ICBC deliver a net return of 2.89 per cent for a six-month term.
Over one year, Rabo offers 2.81 per cent and Rabo 2.85 per cent.
Even out to five years, TSB only offers 3.05 per cent after tax and Rabo 3.14 per cent.
To add to the pain the Reserve Bank keeps sending a strong hint the road ahead is worse. Tyre pressure is low with little inflation. Around the world other pelotons of pensioners are on scooters. The best three-year fixed-rate bonds in the UK pay a measly 1.56 per cent gross.
The world has changed and there comes a time where we need to recognise this as a paradigm shift, not a short-term blip. As a savings vehicle, cash is as useful as square wheels. It is only a holding pen for short-term funds.
KiwiSaver to KiwiSpender
We need a mind-shift into remain fully invested for the duration of retirement. That means holding non-cash asset classes (shares, bonds and property funds) until we are aged well into our 80s.
Most retirees realise they need to eat their nest egg over their lifetime.
Slugs of capital are withdrawn along with on-going investment returns to form one income stream to top-up superannuation. But the calculation itself becomes a dark-art. Many feel forced to take such a cautious approach, lifestyles are suffering.
A large product development push from fund managers and banks is required. We are ready for the next step to be packaged up. Very simply, KiwiSaver needs to transfer seamlessly to a KiwiSpender portfolio for retirees. The money remains fully invested, but monthly income and full access is added.
You input your own life expectancy over which to spread payments. You decide if you want an inflation adjustment to protect your spending power. It's your call on whether there is more money when you are younger or level payments.
Input whether you'd like any lump sum withdrawals now or at later dates to allow for holidays, cars and new bicycles. Weigh up the risk level of the portfolio for your KiwiSpender.
This will dictate the likely returns, no different than KiwiSaver.
Your manager monitors
Your bank calculates your withdrawal level and gives you a mathematical probability of your portfolio lasting the distance and funding you to the life expectancy you selected. Each year they can report whether the portfolio is ahead or behind schedule, to allow you to reduce or increase payments.
A KiwiSpender portfolio is fully flexible. If you need emergency funds you have immediate access, just like a bank account, but you'll have to lower your monthly payments to allow for them. Get a terminal illness and unlock the lot.
Life is now a Grand Tour with retirees requiring 30 years of financial planning to last the distance. The financial industry must find solutions for a post-KiwiSaver retirement product. When banks and fund managers figure out there is money to be made from divesting as well as investing, perhaps we'll see some solutions come to market. If it's robotic and investor-driven, let's hope the fees will be the carbon fibre variety.