Financial advisers have several ways of describing retirement spending patterns, but three popular and easy-to-understand terms are: the go-go years, the slow-go years and the no-go years. But is this actually what happens, according to the latest research?
We know there are a number of questions without answers when it comes to understanding life in retirement – longevity and healthcare costs to name just two.
So, it would seem sensible to research known spending patterns in retirement in a bid to build a level of confidence about what to expect. Generally, and acknowledging that retirement is as individual as every Australian, when does peak spending occur? Does it tail off as we get older?
But first, how is the baby boomer generation placed financially?
The Australian Centre for Financial Studies (ACFS) concluded in Expenditure Patterns in Retirement, which is based on the 2014 Household, Income and Labour Dynamics in Australia (HILDA) Survey, that this is the wealthiest retired generation in Australian history.
Households in their late 50s in 2014 held 25 to 40 per cent more net wealth than their same-aged peers reported in 2002 (adjusted for inflation). The average net wealth of households aged 70–74 had almost doubled since 2002, from $562,000 to more than $1 million.
Median wealth – the middle value in a list of figures – had shown similar growth over the period – 74 per cent growth in wealth for households aged 70–74 and 36 per cent for households aged 55–59 – but at a much lower level. The median wealth of a household aged 65–69 in 2014 was $685,000, compared with average household wealth of $1.24 million.
But with greater household wealth and better healthcare comes longevity – the double-edged sword – and advice from the Actuaries Institute that new retirees should be planning their budgets around living to 100.
According to Expenditure Patterns in Retirement, household spending does not “decrease materially” throughout retirement. The ACFS analysis of HILDA data, which involved panel surveys with 9500 households across Australia, found that retired households aged 73–76 in the 2014 survey did not report lower household expenditure on an inflation-adjusted basis than they did in the 2006 or 2010 surveys.
Households in the 83–86 age range in 2014 reported slightly higher expenditure than in 2006 and 2010. The composition of the spending was fairly constant in the early years of retirement, however after age 75, food costs decreased slightly and spending on utilities increased slightly.
Expenditure patterns are integral in designing income products – and in developing your spending strategies – and based on the ACFS analysis, income products should aim to deliver a stable (inflation adjusted) income for the duration of retirement.
Think tank the Grattan Institute and international actuarial and consulting firm Milliman have a different view.
Milliman says a median retired couple’s expenditure falls by more than one third (36.7 per cent) as they move from their peak spending years in early retirement (65 to 69) and into older age (85 years and beyond). “The decline in expenditure for couples is relatively stable in the early years of retirement at about six per cent to eight per cent across each four-year age band, but then rapidly accelerates once retirees pass 80 years of age,” Milliman reports.
“The result is many retirees are holding money back for future years when they will never spend it.”
Milliman says its Retirement Expectations and Spending Profiles (ESP) analysis, which includes the latest census income data, is the first based on the actual spending of more than 300,000 Australian retirees.
The data shows that retirees’ food expenditure declines steeply with age, while health spending increases but dips again after age 80. All discretionary expenditure, such as travel and leisure, declines throughout retirement.
Milliman says its findings cast doubt on some common rules of thumb, such as aiming to save enough super to replace a set percentage of pre-retirement income.
“Financial plans and products should reflect these expenditure changes over time as well as the greater risks (such as market downturns) and uncertainties (such as health events) that retirees face compared to the broader population.”
Milliman says that many products aimed at retirees assume their spending will rise in line with the CPI. It warns that the investment targets of some MyRetirement (or comprehensive income product for retirement – CIPR) defaults are likely to fall into the trap.
The Australian Government Actuary released its certification test in May 2017, requiring that the constant real income delivered by CIPRs be indexed to CPI.
The Milliman ESP analysis shows that retirees’ overall cost of living does not increase in line with CPI – rather, it falls – and that the components of their spending differs substantially. This means that CIPRs will assume an income target that is not in line with retirees’ lifestyles, Milliman says.
So, while Milliman insists that overall spending declines, it says there are significant variations between the lowest and highest earners and to expect expenditure trends to change due to declining home ownership levels, particularly in Sydney and Melbourne.
The Grattan Institute supports the Milliman conclusion that spending in retirement declines.
Institute associate Jonathan Nolan and household finances program director Brendan Coates recently wrote that HILDA omits several important spending categories, such as recreation – the third largest category of household spending and a critical source of expenditure in retirement.
“The HILDA survey misses a lot of the spending story,” the co-authors say in a blog, Using the right survey to measure retiree spending. “It captures only half of total household expenditure captured by the Household Expenditure Survey (HES) conducted by the Australian Bureau of Statistics (ABS).
“Unlike HILDA, which is designed to track households’ incomes and work patterns, the HES is specifically designed just to measure household spending.”
The Grattan Institute’s 2018 Money in Retirement report uses successive waves of the HES to track how retirees’ spending changes as they age.
The report found that Australians tend to spend less after they retire. “Even the wealthy eat out less, drink less alcohol and replace clothing and furniture less often,” say Messrs Nolan and Coates. “Spending tends to slow at around the age of 70, and decreases rapidly after 80.”
They say that retirees who own their home tend to have paid off the mortgage and no longer need to spend money on children or work-related expenses.
“Pensioners also spend less because they get discounts on council rates, car registration, electricity and gas bills, public transport fares and pharmaceuticals. Public transport concessions apply to all retirees – not just pensioners. Retirees’ spending also tends to be lower because they have more time, and so cook at home more and eat out less.
“They spend more on healthcare as they age, but Medicare largely shields them from the full costs. The modestly higher out-of-pocket costs they do pay are mainly due to rising premiums for private health insurance.”
The Grattan authors say that international studies make similar findings, pointing to reports using the British Family Expenditure Survey and the American Income Dynamics and the Consumer Expenditure Survey. Both found spending decreases into retirement. Another prominent US study found that real spending falls by around one per cent each year in retirement.
The Australia Institute senior economist Matt Grudnoff adds: “Another thing to consider is that spending doesn’t slow down because someone enters their 80s, it slows down because retired people slow down.
“If advances in medical science mean that 80 is the new 70, then the age at which people’s spending slows will increase. That is likely to be a slow-moving effect that will push out when the decrease in spending occurs.”
The Milliman and Grattan conclusions on retiree spending can help to shape plans and, possibly, ease concerns.
YourLifeChoices’ 2019 Ensuring Financial Security in Retirement Survey, completed by 3380 members, painted a very clear picture of the key concerns of older Australians.
Asked, ‘How confident are you that your savings and income will enable you to maintain your current lifestyle for as long as you live?’, the responses were:
- very 11.8 per cent
- somewhat 33.2 per cent
- not very 26.4 per cent
- not at all 11.8 per cent
- neutral 16.8 per cent.
Asked about their most pressing financial concerns in retirement (they could select up to three), respondents said:
- not being able to afford long-term care expenses, such as in-home care or nursing home care 42.3 per cent
- not being able to afford to live comfortably throughout retirement 41.5 per cent
- income from retirement savings not keeping up with the cost of living 39 per cent
- the possibility of outliving retirement savings 35 per cent
- the possibility of losing retirement savings because of falls in the market 33 per cent
- not being able to maintain current standards of living in retirement 33 per cent
- not having extra money on hand in retirement in the event of an emergency 32 per cent.
The costs of in-home and residential aged care are, perhaps, the sleeping giant in retirement expenditure.
In YourLifeChoices’ 2019 Retirement Income Review Survey, which drew almost 5000 responses, members were asked if they had planned for the cost of aged care in their home and, second, in a residential facility. Almost 80 per cent (79.4) said no to the first question and close to 90 per cent (87.4) said no to the second.
Aged Care Steps director Louise Biti says that the findings of Milliman and similar surveys are backward looking and do not take into account quality of lifestyle or future care possibilities.
“Longevity is on the rise, and so is the period of frailty,” she says. “People are more likely to experience frailty in the later years of life and need support … The [aged care] royal commission is showing that the expectations for care are increasing beyond the needs or expectations of previous generations and so the cost to deliver to these expectations is increasing.
“This will increase costs for consumers, so I don’t believe our living expenditure will decrease in later years.
“We are also increasingly wanting to access care in our own homes and on our own terms. Technology can facilitate this, but again at a cost the consumer will need to bear.”
Knowledge is power. Over to you.
What has been your experience of spending in retirement? Do you expect your spending to decrease as you age?
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