SPENDING IN RETIREMENT
By Denise Slattery
It would appear that many retirees may underestimate the dramatic fall in their income needs as they move further into their retirement years.
A study undertaken by Milliman Australia into the spending patterns of retirees as they enter the later years of retirement has highlighted that most Australians significantly reduce their spending after they have moved from the peak spending years in early retirement into the older years after age 85.
Studies undertaken by the Association of Superannuation Funds of Australia (ASFA) has previously estimated a ‘comfortable’ couple aged 85+ years will spend about 8% less than those aged 65-85 years of age. Another industry study by the Australian Institute of Superannuation Trustees (AIST), based on Household, Income and Labour Dynamics in Australia (HILDA) data, has suggested that spending may not decline materially through retirement at all.
However, the study undertaken by Milliman is the first study that is based on the actual spending habits of more than 300,000 retirees. Their study has shown that a retired couple’s expenditure reduces by more than a third (about 36.7% ) from the early years of retirement (65 to 69 years) to the later years, following their 85th birthday, as discretionary expenditure on items such as food, travel and leisure declines rapidly after the age of 80.
This faster than expected drop off in expenditure would suggest that assuming a steady or increasing expenditure over time is, in fact, conservative when compared to actual behaviour.
The chart below compares a small increase of 3% each year in retirement spending with an equivalent 3% decrease. This small change in retirement spending habits has massive implications on retirement balances. In fact, the second scenario where spending decreases slightly each year results in retirees ending up with a higher account balance than when they first retired, due to the underlying growth in the asset value being greater than the spending level.
Based on an initial withdrawal amount of $50,0000 p.a. with an assumed growth rate of 4% per annum on the balance, post withdrawal, each period
Source: Milliman Australia
Of course, these charts do not factor in the increase in the minimum pension payments required throughout your retirement, which may require taking additional funds in excess of your spending needs but merely serves to highlight the impact of small changes in retirement spending can have on your asset base.
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