Retirees, their financial planners and super funds are going about their retirement income planning the wrong way because they are underestimating the big fall-off in retiree spending in old age, according to new research.
As a result, many retirees may be holding back money for future years that they will never spend.
Actuarial consultant Milliman’s Retirement Expectations and Spending Profiles shows that the median retired couple’s expenditure falls by 36.7 per cent as they move from early retirement into old age – 85 and beyond.
Milliman has previously reported that the peak spending years in retirement are aged 65 to 69, when the average annual spend for couples is around $44,000.
It found that from there spending declines by 6 to 8 per cent a year through the 70s and early 80s but then drops more sharply after age 85, when the average drops to around $25,000.
Its latest analysis looks at census data to compare people on different income levels. It shows that poor, middle-income and high-income retirees follow a similar pattern, with declining expenditure throughout retirement.
All three groups have income that exceeds their spending by the time they get into their 80s.
Milliman’s research is based on the real world experience of more than 300,000 older Australians. Its figures come from data company Quantium, which receives de-identified spending information from banks.
Milliman senior consultant Jeff Gebler says spending on household goods and services, travel, leisure and housing declines over time, while spending on food, energy and insurance remains the same.
Only spending on healthcare increases. And while the actual health cost continues to go up, more and more of it is covered by the public system as people get older.
Gebler says the analysis casts doubt on common retirement income targets, such as percentage of salary or linking projected spending to changes in inflation, which do not make enough allowance for life style change.
“Many products aimed at retirees assume that their spending will rise in line with CPI. More than half of all balanced pension funds rank their performance against CPI.
“The result is many retirees are holding money back for future years when they will never spend it,” he says.