Is your mindset about spending in retirement holding you back?

A lack of confidence about how much to spend in retirement can mean some retirees end up living too frugally. In fact, one study showed over half of Australians restrict their spending through retirement, and many, possibly up to a third, live as if they are in poverty.¹

With decades spent focusing on saving enough for retirement, it can be easy to overlook your spending plan. In this article we explore how spending in retirement changes over time and why having a plan for your retirement income can help you worry less (and maybe spend a little more).

1 Morningstar, Should retirees spend more and worry less?

Australians are traditionally reluctant to spend their ‘nest egg’

Shifting your mindset from saving to spending in retirement can be a challenge. Particularly at a time when the cost of living is on the rise and inflation dominates the news. Research tells us that on average across all wealth levels, most current retirees still had 80% of their pre-retirement savings after almost two decades in retirement.²

The evidence indicates that retirees tend to hold on to their assets and leave significant bequests, even though surveys suggest people do not prioritise leaving a bequest. Over $120 billion was passed on in 2018, more than double the amount it was in 2002. Some estimates say that up to 70 percent of Australians don't have a legally binding will, so it begs the question whether these inheritances reached the intended beneficiaries.³

According to the Federal Government’s 2020 Retirement Income Review part of the problem is perception. Many Australians believe they should live off earnings from their superannuation, without accessing the capital.⁴ While it’s important to plan sensibly to avoid running out of money, if retirees felt confident to draw down more on their assets, they could potentially enjoy a higher standard of living in retirement.⁵

2 Blackrock, To spend or not to spend, January 2023
3 ABC, Up to 70 percent of Australians don't have a legally binding will, March 2021
4 Treasury, Retirement Income Review, November 2020
5 Treasury, Retirement Income Review, November 2020

How much do Australians spend in retirement?

One study showed that when asked about their spending plans at the beginning of retirement, 43% said they expected to spend consistently.⁶ The reality is spending needs are likely to change over the course of retirement, which makes sense when you consider you could be retired for 20-30 years.

While everyone’s situation is different, data and research from different sources suggests that overall spending falls during retirement. This can be for a number of reasons including:

• You won’t be saving money for retirement
• You won’t need to pay tax on most sources of income
• You’re less likely to have debts to repay or costs associated with raising a family
• You may be eligible for various discounts, which can reduce day-to-day costs such as public transport.

Even though the overall trend is a reduction in spending, the data shows that spending patterns change with age.

6 Blackrock, To spend or not to spend, January 2023

The peak spending years: 65 to 69

The years immediately after you finish work are a time when you’re likely to spend more than you would later in your retirement. Based on their analysis of expenditure data for 300,000 retirees, Milliman Australia found that 65 to 69 are the peak spending years for retirees⁷. Research from the Grattan Institute backs this up. Using Household Expenditure Survey figures from the Australian Bureau of Statistics, their experts discovered that spending on food, transport and recreation is higher among Australians aged 60-69 when compared with retirees aged 70+⁸.

These trends make sense when you think about the potential impact of ageing on health and lifestyle. It makes sense to spend more on travel and experiences in the early years of retirement when you’re in good health and have time to enjoy the freedom of not working.

7 Milliman, Spending patterns — providing comfort to retirees in a volatile market, 20 April 2020 https://au.milliman.com/en/insight/Spending-patterns-providing-comfort-to-retirees-in-a-volatile-market
8 Grattan Institute, The Savings Behaviour of Older Households

Less travel, more healthcare spending: 70 to 79

In their report on the Savings Behaviour of Older Households, the Grattan Institute say that overall spending tends to slow at around age 70⁹. Their research suggests that retirees start spending less on eating out, alcohol and clothing after they reach this age and that this happens regardless of how wealthy they are.

Milliman research estimates just how much spending declines, on average, between the ages of 70 and 80. They calculate that retirees can expect their spending to fall at a rate of 6% to 8% across each four-year age band until they turn 80 years of age¹⁰. While some of this comes from reduced spending on leisure and travel, they also found that food bills – which make up the largest part of essential spending – fall significantly. Their figures also show that healthcare costs can start to increase after age 70 but not by enough to offset lower spending on food, travel and leisure.

All this data points to a modest fall in household spending for retirees in their 70s. This can be worth factoring into your longer-term budgeting and how much you’ll need to draw from your super and other sources of income during these retirement years.

9 Grattan Institute, The Savings Behaviour of Older Households
10 Milliman, Spending patterns - providing comfort to retirees in a volatile market, 20 April 2020 https://au.milliman.com/en/insight/Spending-patterns-providing-comfort-to-retirees-in-a-volatile-market

Living on less: 80+

As a key source of information on retirement spending, the ASFA Retirement Standard provides detailed information on the annual budget needed for Australians to fund a standard of living in retirement. First launched in 2004, the AFSA Retirement Standard regularly publishes budgets for a modest and comfortable retirement lifestyle, for couples and for single retirees. Both budgets assume that retirees own their own home outright and are relatively healthy.

As well as publishing these budget estimates, the ASFA also issue an additional set of figures for retirees aged 85+. They expect spending for a ‘comfortable’ couple, for example, to drop by around 7.8% once they pass this milestone¹¹. The Grattan Institute also reports a sharper fall in spending after the age of 80 and Milliman research bears this out, with a drop in healthcare spending expected at this time.

11 Milliman, Spending patterns - providing comfort to retirees in a volatile market, 20 April 2020 https://au.milliman.com/en/insight/Spending-patterns-providing-comfort-to-retirees-in-a-volatile-market

Matching your spending to your retirement income

Looking across these estimates and numbers on actual spending, the data suggests you’re unlikely to spend at the same steady rate throughout retirement. When you’re planning your finances for a comfortable retirement, give some thought to how and why your spending might change and by how much. This will depend on many things, including your health, life choices, and your family situation. Choosing to spend more on travel in the early years, for example, can be less of a risk to your financial security later on if you have a realistic budget across your whole retirement and income to match. This budget should include a buffer for unexpected expenses.

Turning your super into a retirement income stream

By rolling over your SASS benefit at retirement to another super fund, you can access products in the retirement phase of super that are designed to provide you with regular income, such as an account-based pension. Importantly, moving your super to a retirement income account could mean you have more income each year than if you took your money as a lump sum.

The Age Pension provides a safety net

It’s not possible to predict how long you will spend in retirement or what unexpected costs you may have along the way. The Age Pension provides Australia retirees with a safety net.

You may not be eligible for the Government Age Pension now, but over time your income and assets will change. So it’s important to keep checking because you could become eligible in future.

Aware Super has partnered with Retirement Essentials to help you feel confident that you’re getting all your Age Pension entitlements. Use their calculator to find out how much you could get if you’re eligible.

At Aware Super we encourage clients to think in terms of how much you’ll be spending instead of how much you’ll need in savings. Once you understand how much you want to spend, you can start to plan for the retirement income you’ll need.

The information contained in this article is given in good faith and has been derived from sources believed to be reliable and accurate. No warranty as to the accuracy or completeness of this information is given and no responsibility is accepted by Aware Super Pty Ltd or its employees for any loss or damage arising from reliance on the information provided.

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