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As you approach retirement, you may have already spent time thinking about your likely spending habits once you stop work for good.
We will review some industry reports to see how much retirees are spending, and help you assess what your own needs and preferences may be.
Knowing what and where you will spend will make retirement planning much easier, and help you avoid what many retirees fear: outliving their savings.
Breaking down the ASFA Retirement Standard
The Standard uses common terms to present three broad categories: a comfortable retirement, a modest retirement, and one based solely on the Age Pension.
- A comfortable retirement involves enough money to pay for house repairs, occasional holidays including overseas trips, a good car, regular leisure and lifestyle activities, and many other discretionary items that form daily living. For couples aged around 65, you may need $62,269 per year, and for singles it is $44,146.
- A modest retirement sees cutbacks in many of these areas, with less discretionary spending but still with the ability to afford a car and enjoy most leisure activities. For couples aged around 65 it is $40,560, and for singles it is $28,165.
- A retirement based on the Age Pension could mean a very limited lifestyle on a tight budget, with most spending to be at a basic level, such as essential items only. An Age Pension will pay approximately $36,582 per year for couples, and $24,268 for singles.
The figures for retirees aged around 85 are slightly less but not hugely different. The main differences are:
- More money needed for health, in-home cleaning and care services, due to less mobility in this age group
- Less money for transport and leisure, perhaps related to not owning a car, and less mobility or willingness to join out-of-home activities.
|Budget / lifestyle for Couples||Aged 65||Aged 85|
|Budget / lifestyle for Singles||Aged 65||Aged 85|
Sources: Centrelink, ASFA
Note: Age Pension rates as at 20 September 2019. Couples rate based on living together. Modest and Comfortable lifestyles as at December 2019 quarter.
Don’t rely solely on projections
In reality the figures suggest there is not much difference between a modest lifestyle and one based on the Age Pension. There is only 10% difference between the two budgets for couples, and 15% for singles. Note also that the ASFA budgets assume that retirees own their own home outright and are relatively healthy.
The Age Pension also comes with supplements and rent assistance (if you are renting) for eligible retirees, albeit smallish amounts, which may further cloud any projections or assumptions.
While the ASFA budgets provide food for thought, it’s best not to take them as the final word as budget projections can be highly variable. For example, updating a kitchen and bathroom can be quite expensive, more so than presented in the budgets discussed. ASFA suggest that under the comfortable lifestyle you have the budget to “replace kitchen and bathroom over 20 years” – yet there is just $6.47 per week to cover this – $6,729 over 20 years. That may not be a realistic budget for many people when material and labour costs and personal tastes come into the equation.
Home improvement, repairs and maintenance are a big topic in itself, often discretionary rather than fixed, and don’t fit neatly into weekly or monthly expense scenarios.
The issue with such categories – and any others that might be out there in media commentary – is that each individual or couple have their own views of what would be a modest or comfortable retirement for them personally.
Some are content to live a simple life and have no desire for luxury items or even regular social outings, such as restaurants. Others may reach retirement and perhaps after having spent years raising kids and working, want to ‘splash out’ somewhat and be able to travel, spend and socialise when the urge hits. A common rule of thumb is that you will need 66–80% of your pre-retirement income to enjoy your current standard of living into retirement.
What areas will most impact my cost of living in retirement?
The big question then is: What type of retirement do you want, and what might that cost? Should I track spending, or just do a budget?
We will assume you are in reasonable health and don’t need to provide funds for major surgeries or treatments caused by trauma or disease, although that can become an issue at any point, particularly for the very elderly.
Below we cover the major areas that could impact most on your spending.
Owning a home
The Centre of Excellence in Population Ageing Research (CEPAR) found that owning your own home mortgage-free, instead of renting, significantly helps provide a modest level, or better, in retirement.
Around 80% of Australians retirees own their own home, but for the remaining 20% the outlook is not so great. CEPAR senior research fellow Rafal Chomik says while most Australians will enjoy their modest retirement lifestyle, the living standards of those who rent in retirement are very different since only around 15% of older renters can afford a lifestyle better than modest. Single renters are particularly at risk of living below a modest retirement.
Among all older people only about 10% fall below the poverty line set at half the median income. Among older Australians who rent, 40% fall below. Among older Australians who rent alone, it’s more than 60%.
Where you live
In some cities and regions in Australia, prices for common items such as petrol and food exceed the national average, not to mention other discretionary or leisure products. Research by HILDA from a few years ago found that the biggest difference in the level of spending was between households in Sydney where retiree spending was $44,672 on average compared to households in regional South Australia where household spending was $22,017, less than half! Melbourne retirees were spending $34,000 and Tasmanians $25,000.
Not everyone wants a sea or tree change, but moving can be attractive if there are amenities and services that fit your needs, whether they be health-related or reduce your overall weekly or monthly spend. Retirement villages can offer a pleasant lifestyle but look closely at their fees and charges to see if this arrangement suits you. Vertical retirement villages, or high-rise living, is a new trend for retirees who want to stay in the bustle of a city close to services and transport.
Learn more in SuperGuide article Location the missing ingredient in retirement planning.
Your age and lifestyle
Decide what activities and services are important to your overall happiness. Can you cut back on subscriptions, alcohol, restaurants and holidays, for example? A 2018 report from Challenger referencing the HILDA demographic survey reaffirmed that younger retirees generally spend more than older retirees. The so-called active phase of retirement sees more spent on wants rather than needs, but the ‘passive’ phase of retirement after age 75 involves more money being kept for essentials like healthcare.
This is consistent with the Milliman Retirement Expectations and Spending Profiles study that shows a falling retirement spend in Australia is driven by behaviour, not income. This may partially be a case of insuring against longevity risk (the risk that retirees run out of savings before they die), to leave a bequest to children, or for other reasons that are not clear.
The Milliman research, which tracked the spending of more than 300,000 older Australians, showed the average proportion of income spent on housing, food, energy, leisure, goods and services, travel and insurance either declines slightly or remains the same, regardless of income levels, through retirement. Only healthcare spending increases.
Couple or single – differences in spend
A report by the Australian Centre for Financial Studies delves deeper into the HILDA survey and provides a comprehensive overview of spending patterns. It found that single person retirees were of greater risk of financial hardship, with spending actually exceeding income for those with the lowest 20% of income. Retiree couples aged 65–74 spent just $33,200 a year on average, while single households of the same age spent an average of only $18,400.
How long will you live?
SuperGuide has a suite of articles on life expectancy, which shows the most recent government figures (2016–2018) reporting life expectancy for a newborn male at 80.7 years, and for a newborn female 84.9 years.
Many of us probably know people in their 80s who are in reasonable health. However, chronic disease is on the rise and it’s not uncommon for many retirees to have non-life-threatening ailments and conditions that can put a dent in the pocket, requiring regular medications and trips to the doctor.
The vitamins, minerals and supplements industry has also grown exponentially in the past decade. Before spending your hard-earned on a swag of pills, powder and liquid, find out if you can get this nutrition naturally through an improved diet. Pathology or blood tests may indicate you have a deficiency in certain vitamins or minerals, in which case purchasing these may be warranted. Always seek your doctor’s advice.
Estate planning – leaving money once you are gone
The research, which shows many retirees do not spend big (particularly in later years), may suggest some have estate planning in mind. This means leaving behind inheritances and other money (such as super) to children and other dependants. Super does not automatically form part of your estate, so always seek legal and financial planning advice. Estate planning can be complex from a tax, legal and financial perspective.
Work out how much you may want to leave behind to any spouse or children. You will need to be clear as to who your beneficiaries are and how any proceeds are to be distributed.
Track all your areas of spending
Have you promised your adult children you will stump up some cash to help them with a home deposit? Do you regularly donate to charities or have subscriptions you have forgotten about that appear in your online bank profile every month?
Keep track of these aspects and perhaps also do an audit of what may need updating every year, such as clothes or club memberships. Other expenses may include the annual cost of having credit cards, loyalty scheme annual charges and so on.
Creating an expenses budget is relatively simple and there are templates available online. Perhaps prepare a monthly budget of all your fixed costs as an average, such as utilities, rates, internet, phone, any subscriptions, transport, food and household items and insurances. Bills are often set monthly rather than weekly, so monthly may be the easier option.
Next you work out how much money you are willing or able to spend on discretionary or luxury items, such as holidays, restaurants, extra household items, renovations and repairs, wedding or birthday presents and so on.
Also look at your debit and credit arrangements and adjust them so you can easily track spending on your statements. There’s no shame in getting quotes to compare prices, finding bargains or switching to lower-cost generic brand products, all of which may save thousands of dollars each year.
Checklist to managing your spending
- Set your goals for the standard of living you want in retirement and discuss with your spouse or partner.
- Track expenses either using a monthly budget or another means.
- Find cheaper alternatives across the spectrum, whether it be generic food products or lower-cost, environmentally-sound home renovations.
- Delay purchases if cheaper versions of a product or service will be released at a later point and look at how innovative credit and debit arrangements can help.
- Spend wisely on discretionary or luxury items if their cost is prohibitive to your budget.
- Seek various quotes for professional services, whether they be advisers, tradesmen or medical, and ensure they hold the relevant qualifications and licences.
- Consider how much money you need for estate planning purposes – how much money or assets do you want to leave to your spouse, children or dependants?
How much super will I need to boost my retirement income?
Once you have a better idea of what your retirement cost of living could be, the next step is to work out how much super you will need to finance that lifestyle.