The three phases of the spending curve
Understanding the different phases of retirement and how your spending needs will change over time is crucial for setting a sensible budget to achieve effective long-term retirement planning. By matching your income to your evolving needs and regularly checking in on your financial plan, you’ll be setting yourself up for a comfortable and financially secure retirement.
For most Australians, retirement typically moves through three spending phases that match both lifestyle choices and the ageing process.
Early Retirement (65-74 years)
In the early phase of retirement, typically from age 65 to 74, you’re likely to be mobile, physically fit, and living out your retirement dreams. This is often the most active and expensive phase of retirement. Many people take this opportunity to travel, engage in hobbies, or even pursue new educational opportunities. With the excitement of newfound freedom, spending is usually higher during this phase as you tick off your bucket list items.
Middle Retirement (75-84 years)
As you move into the middle phase, around age 75 to 84, your lifestyle begins to shift. You’re most likely to have completed major travel and big-ticket purchases, so life becomes more relaxed. You may still be active but enjoying life at a different pace. The focus often shifts to enjoying a comfortable daily routine, spending time with family and friends. As a result, your spending typically drops during this phase, along with the need for large expenditures.
Late Retirement (85+ years)
In the late phase, from age 85 onwards, healthcare needs tend to increase, and you may require more support or aged care services. This stage is marked by higher medical and care expenses, which can cause a second spike in spending. It's important to have provisions in place to cover these increased costs.
Matching your income to your changing needs
Planning for the different phases of retirement is essential to ensuring your financial stability. Here are the most important steps to help you plan effectively.
- Set clear goals
What do you want to do in your retirement? Whether it's supporting family, traveling, volunteering, or spending time with loved ones, having clear goals can help you budget effectively. Knowing what you want to achieve in each phase of retirement will guide your financial planning.
- Understand the fundamentals
Things can change in your earning capacity, health and family situation, but it’s possible to get a good projection of your retirement income, expected household expenditure and likely debt repayments with a little number crunching. It’s important to factor in inflation, market fluctuations, healthcare costs, and estate planning into your broader financial plan. And to consider what debts (like a mortgage) can be paid off: the less debt you have, the less vulnerable you are to fluctuating interest rates, so you have more leeway with your spending.
- Review regularly
It’s a good idea to set an initial spending plan and review it every year. You can adjust your plan as circumstances change, so it remains aligned with your current needs and financial goals. Regular review of your financial situation can help you stay on track and make necessary adjustments to avoid shortfalls.
Understanding how long your super will last
One of the key aspects of retirement planning is understanding how long your superannuation will last. The longevity of your super depends on several factors, including how much you’ve saved, your investment returns, your spending habits and any age pension entitlements.
Your financial planner is an expert in all facets of retirement finances and can tailor a plan to suit your individual circumstances and changing needs.
