How to plan your spending through the 3 stages of retirement

As you slow down mentally and physically, most retirees adopt a more passive lifestyle. This means your spending tends to reduce.

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 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 an aged care facility, which requires very substantial funding for a refundable deposit or regular 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.

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 a super fund member saving for retirement – or a pre-retiree 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.

Indeed, the government’s 2020 Retirement Income Review noted some international researchers have found spending in retirement grows in line with prices, as people have a similar standard of living in their retirement as they had in their working life.

But many Australian financial advisers take a different view, arguing Aussies tend to find their retirement expenditure is more likely to resemble a lop-sided smile – high 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 lots 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.

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, 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 quarterly research study outlines the annual expenditure of retired Aussies enjoying either a ‘comfortable’ or ‘modest’ standard of living in their post-work years.

While most people focus on the main budget that estimates the spending requirements of retirees aged 65 to 85, if you want to learn more about your likely spending in the latter years of retirement, check out ASFA’s additional household budget survey for retirees aged over 85.

This second Retirement Standard includes many of the costs facing older retirees, such as assistance in the home (including cleaning services and meals), increased out-of-pocket expenses for major medical procedures and on-going chemist and other medical expenses.

ASFA Retirement Standard budget for households (June Quarter 2021)

Note: The figures assume the retiree(s) owns their own home and relate to expenditure by the household. This can be greater than household income after income tax where there is a drawdown on capital over the period of retirement.

The ASFA Retirement Standard for those aged 85 and over 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 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.