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When you’re still in the workforce, the idea of retirement usually evokes an image of one long holiday doing whatever you want – without the boss looking over your shoulder.
For most people, however, the reality of retirement is a little different. The typical retirement actually consists of several phases, each with its own spending pattern. Some phases involve more spending, some less.
If you want to create a successful retirement plan, the first step is to get a realistic idea of what retirement is like, so you can ensure you have enough money to support yourself.
Just as important, however, is coming to grips with how much you’re likely to spend during each retirement phase, so you can set a sensible budget for your spending.
Understanding your retirement years
For most Aussies, retirement generally progresses through three distinct stages. These periods are based on your health and the type of activities you pursue as you age. Your spending pattern in each stage reflects this.
Although we’re all different, a simple way to think about your retirement is to view it as being broken into:
Stage 1: The Active Years
In the early years you will generally have the same physical capabilities you had during the latter years of your working life. You will have more free time in retirement, so plan to spend more money on leisure activities and less on work-related expenses.
This phase often involves more time for hobbies, entertainment, overseas travel, home renovation and caring for grandchildren. Increasingly, some active retirees choose to undertake part-time work or volunteer in their local community.
Stage 2: The Sedentary Years
As you slow down mentally and physically, most retirees adopt a more passive lifestyle. This means your spending tends to fall.
In this phase, many retirees move into a smaller home, travel tends to be closer to home and there is more expenditure on health. Retirees in this phase also tend to start thinking about aged care and estate planning, if they haven’t already done so.
Stage 3: The Frail Years
In later life, we can become increasingly frail and our ability to move around decreases. Restricted mobility means your leisure activities tend to be more limited and your health costs often increase.
Many retirees in this stage start needing help around the house and in their daily activities, or they consider moving into a retirement village. Some retirees need to fund home-based care or move into a residential aged care facility, which requires very substantial funding for a refundable deposit or home care fees.
This diagram shows some of the usual characteristics of the three phases of retirement in terms of lifestyle, work participation, spending patterns and housing. As you can see, there is some age overlap depending on your health.
Source: Michael Rice, Rice Warner (2014), cited in Productivity Commission Research Paper, Housing Decisions of Older Australians, December 2015.
What does this mean for my retirement budget?
As you go through the process of saving for your retirement – or even if your retirement is fast approaching and you’re trying to develop a budget for your latter years – understanding these three stages of retirement may help you work out your likely expenditure and how much super you will need to pay for it.
Many pre-retirees planning for their retirement assume they will need a constant level of income in retirement, indexed to the Consumer Price Index (CPI) to cover inflation – a straight line that gently slopes upwards.
The government’s Retirement Income Review in 2020 took this approach, noting many international researchers had found spending in retirement grows in line with prices, as people have a similar standard of living in retirement as they have during their working life.
But many Australian financial experts take a different view, arguing spending by retirees is not constant over time – it changes with age.
The retirement expenditure of Aussies tends to be more like a lop-sided smile – higher spending at both ends (albeit not quite as high in frail old age) with lower outlays in the middle. The increased expenditure in your late retirement is mainly due to increased medical expenses, rather than more consumption and holidays.
It’s important to note that even with this higher spending in the early and late stages of your retirement, you are still likely to spend less than you did when you were working.
As the Grattan Institute noted in its Money in Retirement: More Than Enough report: “Australians tend to spend less after they retire, and even less into old age. While their medical costs increased, these are largely borne by the taxpayer. Many retirees are net savers, and current retirees often leave a legacy almost as large as their nest egg on the day they retired.”
Typical spending pattern over your retirement years
Research by financial firm Challenger using the HILDA database of retired households, expenditure reached a slightly different conclusion. It notes: “On average, household spending on the regular items in HILDA changed broadly in line with the CPI movements. For single households, it is clear the 80-year-old households spent less than the 70-year-olds who spent less than 60-year-old retirees.”
The HILDA data shows retiree spending on regular essentials remains broadly constant over time, but recent retirees spend more, with older retirees spending less than younger retirees. However, older retirees also “spend a smaller proportion of their total spending on wants, with a higher proportion being spent on needs.”
Regular and other household spending, by age and household in 2015–16
Source: Spending Patterns in Retirement, Challenger Retirement Income Research
How can I budget for my Frail Years?
Although you can’t predict your future health care needs, or how much you will need to spend on home care and support services in your latter years, there is a useful tool you can use to estimate your spending during your Frail stage.
Many pre-retirees are familiar with the Association of Superannuation Funds of Australia (ASFA) Retirement Standard, which provides a great benchmark budget for working out how much you are likely to spend in the first two phases of your retirement. This budget is updated regularly and estimates the annual expenditure of retirees enjoying either a ‘comfortable’ or a ‘modest’ standard of living.
While ASFA’s headline Retirement Standard estimates the spending of retirees aged 65 to 84, it also provides an additional household budget for retirees aged 85 and over.
This second budget includes the costs facing many older retirees, such as assistance in the home (cleaning services, meals and the like), increased out-of-pocket expenses for major medical procedures and on-going chemist and other medical expenses.
As noted above, for most retirees these expenses become an increasingly important component in their annual expenditure. In contrast, purchases centred around travel, holidays and other consumption tend to decline in this phase of retirement.
ASFA Retirement Standard budget for households aged 65–84 (December quarter 2022)
| Modest lifestyle: Single | Modest lifestyle: Couple | Comfortable lifestyle: Single | Comfortable lifestyle: Couple | |
|---|---|---|---|---|
| Total weekly expenditure | $600.05 | $864.11 | $947.56 | $1,335.08 |
| Total budget per year | $31,323 | $45,106 | $49,462 | $69,691 |
ASFA Retirement Standard budget for households aged around 85 (December quarter 2022)
| Modest lifestyle: Single | Modest lifestyle: Couple | Comfortable lifestyle: Single | Comfortable lifestyle: Couple | |
|---|---|---|---|---|
| Total weekly expenditure | $553.91 | $794.57 | $880.37 | $1,219.14 |
| Total budget per year | $28,914 | $41,477 | $45,955 | $63,639 |
The ASFA Retirement Standard for those aged around 85 also breaks down the annual total into budgets for different spending categories, such as electricity and gas, food, clothing and footwear, health services, council rates, leisure activities and household goods and services.
These categories are provided as estimated weekly expenditure for retirees living both a ‘comfortable’ and ‘modest’ lifestyle. Check out the latest ASFA Retirement Standard here.
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