Location the missing ingredient in retirement planning

Research by actuarial management consultancy Milliman, based on real-life spending of 300,000 Australian retirees, found big differences between city and country living. The spending gap is 7.3% for retirees aged 65–69, growing to almost 11% for those in their early 80s.

But Milliman also found wide variations in retiree spending patterns between states. Canberrans are the biggest spenders, forking out 15.9% more than the national average. While retirees in rural South Australia spend the least, at 10.5% below the national average.

The table below shows the average retirement spend in capital cities and regional areas versus the national average.

Location	vs average national spend
Brisbane	1.37%
Qld regional	-8.05%
Sydney	5.35%
NSW regional	-6.36%
Canberra	15.88%
Melbourne	5.14%
Vic regional	-8.13%
Hobart	-8.45%
Adelaide	-1.91%
SA regional	-10.51%
Perth	4.66%
WA regional	-7.63%

Source: Milliman Retirement Expectations and Spending Profiles 2019

The location effect is not limited to the urban/regional divide; the ‘latte’ dividing lines within capital cities can also have a big effect on retiree spending. For example, Milliman found that retirees in the affluent Sydney suburb of Mosman spend 50% more than their fellow Sydneysiders in Auburn.

Once again, to anyone who knows Sydney that comes as no surprise.

Whether regional variations in spending are due to higher costs in affluent areas, higher incomes providing higher retirement savings and more expensive lifestyles, or a bit of both, is a moot point.

Regional variations in the cost of living

We all suspect intuitively that it’s cheaper to live in the country than the city. You can’t leave the house in a major capital city without paying for parking, road tolls or entertainment. Whereas in the country you’re hard-pressed to find a parking metre let alone an A-reserve seat.

And that’s before you factor in the cost of housing, rent or moving into aged care, which are more expensive in the city than the country and more expensive in some cities and suburbs than others.

Even so, some goods and services are more expensive in more remote areas due to the higher cost of transportation and service delivery.

That said, it is undoubtedly easier to live on a constrained income in some locations than others.

The 2019 HILDA study found the median family income for retirees was below $35,000. Elderly single women were the worst off with median incomes below $30,000 reflecting their lower superannuation balances and higher rate of dependence on the Age Pension.

The psychology of wants vs needs

The cost of living in certain locations also has a psychological and behavioural component, otherwise known as keeping up with the Jones’s.

If your neighbours or friends all have luxury vehicles in their driveway you may feel under pressure to do the same even if a Corolla is more in line with your budget. In some areas, messing around in boats requires a cruising yacht while in others a tinnie will do.

In other words, location and local lifestyles may blur the perception of wants and needs.

The Milliman findings about spending patterns in Mosman vs Auburn show that although Mosmanites spend 50% more than retirees in Auburn, the proportion of discretionary and essential spending is around 50:50 in both locations.

Adding location to the retirement income mix

When it comes to retirement planning, the amount of money you have saved in and out of super is only part of the equation. Just as important is the amount of money you spend.

General retirement planning advice tends to be based around averages. Pre-retirees are shocked into action, or paralysed into inaction, by headlines declaring you need a superannuation balance of $1 million (or another nice round number) to live well in retirement.

As an antidote to this approach, ASFA’s Retirement Standard focuses on retirement spending with sample budgets for modest and comfortable standards of living. It also estimates the superannuation balance you will need to fund a modest or comfortable retirement lifestyle. While providing a helpful planning tool, once again it relies on national averages.

The thing is, none of us is average. The question of how much you need to retire on is personal. The answer will depend on a range of factors including your lifestyle, your health and how long you live, whether you are single or a couple, whether you own your home and where you live. To paraphrase a former Prime Minister, location doesn’t explain everything, but it does explain something.