How to plan your spending through the 3 stages of retirement

As you slow down physically, your lifestyle often slows down. This generally means your spending falls as well.

In this phase, you might downsize into a smaller home if you haven’t already done so, travel closer to home and spend more on health. You may also start thinking about aged care and fine-tuning your estate plan.

Stage 3: The frail years

In later life, we can become increasingly frail and dependent on help to get around. Restricted mobility means your leisure activities tend to be limited and your health costs often increase.

Many retirees in this stage need help around the home and in their daily activities. You may choose to fund home-based care to allow you to stay in your own home for as long as possible or move into a residential aged care facility. While aged care accommodation is subsidised by the government on a means-tested basis, the costs can be substantial for self-funded retirees and need careful planning.

What does this mean for my retirement budget?

As you approach retirement, understanding these three stages and how long each is likely to last may help you work out your likely expenditure and how much super you will need to pay for it.

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Many pre-retirees assume they will need a constant level of income, indexed to the Consumer Price Index (CPI) to cover inflation – a straight line that gently slopes upwards. But that’s unlikely to be the case.

Many Australian financial experts argue that retirement spending 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 due to increased medical and aged care 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

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 later years, there is a useful tool you can use to estimate spending in later life.

Many pre-retirees are familiar with the Association of Superannuation Funds of Australia (ASFA) Retirement Standard, which estimates the annual expenditure of retirees enjoying either a ‘comfortable’ or a ‘modest’ standard of living.

While ASFA’s primary Retirement Standard estimates the spending of retirees aged 65 to 84, it also provides household budgets for retirees aged 85 and over.

This second budget includes costs such as assistance in the home (cleaning services, meals and the like), increased out-of-pocket expenses for major medical procedures and ongoing medicines and other health expenses.

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As noted earlier, for most retirees, these expenses become an increasingly important component in their annual spending. In contrast, spending on travel and leisure activities tends to decline in this phase of retirement.

ASFA Retirement Standard budget for households aged 65–84 (March quarter 2025)

ASFA Retirement Standard budget for households aged around 85+ (March quarter 2025)

As you can see from the tables above, the Age Pension doesn’t stretch to a modest budget, let alone a comfortable lifestyle, so superannuation and other sources of income will be needed to supplement any Age Pension entitlements.

While ASFA’s budget estimates help you understand how much money you may need to fund your retirement, translating that into how much you should withdraw from your super each year is another challenge.

How much can I afford to spend in retirement?

Fear of running out of money and a reluctance to seek financial advice means many people withdraw the minimum amount required from their super account-based pension.

There have been many attempts to create a simple rule of thumb to help people estimate the amount of retirement income they should aim for, although most have been developed overseas.

Learn more about retirement income rules of thumb.

That led the Actuaries Institute to conduct a study for Australian conditions, focusing initially on single homeowners who have reached Age Pension age and receive a full or part-Age Pension in addition to an account-based pension from their super fund.

After testing for retirees of different ages and levels of assets, they calculated optimal drawdown rates from age 67 to 110. They were able to produce a simple, easy-to-communicate rule of thumb.

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Here’s what they found:

• A single retiree should draw down a percentage that is the first digit of their age. For example, if you are 72, you withdraw 7% of your account-based pension
• Add 2% if your account balance is between the Age Pension assets test thresholds.

The above rule is subject to meeting the statutory minimum drawdown rule.

A retiree with the same balance in their 70s would draw down 9% of their savings under the rule of thumb, while someone in their 80s would draw down 10%.

This compares with the current statutory minimum drawdown rates in the table below.

As you can see from the table, a person following the actuaries’ simple rule of thumb would withdraw more money than the statutory minimum up until age 84, when they are likely to be most active and need extra cash. Once they turn 85, they would be required under the current rules to withdraw more than the rule of thumb.

“The optimal drawdown rates are severely impacted by the Age Pension assets test. If you are under the assets test range, for every $1,000 of your account-based pension you spend, the following year your income (from the Age Pension) is likely to increase by 7.8% because the taper rate in the assets test is so high,” says one of the study’s authors, John De Ravin.

In other words, by spending more early in retirement, some retirees will be able to have their cake and eat it too.

“By the time they reach 85, they will have less left in their account-based pension than if they had stuck to the statutory minimum, but there is so much enjoyment of life to be had between the ages of 67 and 85. Expenditure also tends to decline as you age anyway, so we think (the rule of thumb) is a good trade-off.”

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