How to plan your spending through the 3 stages of retirement

For most Aussies, their retirement years normally pass through three distinct stages. These periods are based on your health and the type of activities you usually pursue at different points during your retirement. Your spending pattern in each stage reflects this.

Although we’re all different, for many retirees, a simple way to think about your retirement is to view it as being broken into:

Stage 1: The Active Years

These years are pretty much like the last few years of your working life. You will have more free time in retirement, so you usually spend more on leisure activities and less on work-related expenses.

This phase usually involves more time for hobbies, overseas travel, home renovation and family gatherings. Increasingly, active retirees undertake some part-time work.

Stage 2: The Sedentary Years

As you slow down mentally and physically as your retirement continues most retirees tend to have a more passive lifestyle. This means your expenditure tends to reduce.

In this phase, many retirees move into a smaller home, your travel tends to be closer to home and there is more expenditure on your health. Retirees in this phase also tend to start thinking about aged care planning and estate planning.

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 may consider moving into a retirement village. Some retirees need to move into a nursing home or 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?

The three phases of retirement mean you’re likely to have different spending patterns throughout the different stages of your retirement.

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 will help you work out your likely expenditure and how much you will need in your super account 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.

In reality, the three stages of retirement usually mean your retirement expenditure is more likely to resemble a smile – high spending at both ends with lower outlays in the middle.

Typical spending pattern over your retirement years

How can I budget for my Frail Years?

While the Active phase of retirement often sees lots of spending as you finally get a chance to enjoy the activities you put off during your working life, the final years of your retirement can also be quite costly.

Although you can’t predict your future health care needs, or how much you will need to spend on home care, 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 Australians 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 Australians 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 (March Quarter 2019)

Note: The figures assume the retiree(s) owns their own home and relate to expenditure by the household.

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.

For more information about retirement planning, see SuperGuide articles:

• When should I retire?
• Understanding your life expectancy
• How much super do I need to retire?
• How much super do I need to retire on $60,000 a year?
• How much super do I need to retire on $100,000 a year?
• Is $1 million in super enough to retire on?
• Is $1.6 million in super enough to retire on?