It’s not so much declining income which leads to declining spending in retirement. Age is just as big a factor, according to new research by Milliman. The research casts doubt on the use of common benchmarks, such as a percentage of final salary, as a savings target.
Such benchmarks take little account of lifestyle changes and growing old is a big influence on spending, as you’d expect. The Milliman Retirement Expectations and Spending Profiles (ESP) shows that the median retired couple’s expenditure falls by 36.7 per cent as they move from early retirement (age 65 to 69) and into older age (85 years and beyond).
The analysis includes the latest census income data which reveals that poor, middle-income and high-income retirees all show similar declines in expenditure throughout retirement. For poorer retirees (annual income below $33,800), expenditure briefly peaks above income just before retirement, it then quickly tapers off into older age.
Middle-income retirees (annual income between $33,800 and $91,000) show similar declining expenditure, although their expenditure never exceeds income. Similarly, high-income earners (annual income above $91,000) are also saving money into retirement.
While wealthier retirees spend more in absolute terms, all three groups are saving money in retirement. How spending changes in retirement regardless of wealth the Milliman Retirement ESP provides the most accurate possible picture of retiree behaviour by tracking changes in the real-world expenditure of more than 300,000 older Australians, according to Jeff Gebler, a senior consultant at the firm.
It shows that 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 expenditure on healthcare increases.
But while overall spending declines, there are still significant variations between the lowest and highest earners. There are also important expenditure trends underway with home ownership levels declining in Sydney and Melbourne while energy prices are escalating quickly.
The report says: “While energy represents a small proportion of overall household expenditure, the amount spent is significantly correlated to income levels: higher income households have more expensive (and energy-consuming) lifestyles. Energy expenditure increases until about age 65 and then stabilises before rising from age 80. This may be because elderly Australians spend more time at home and want to feel more comfortable rather than moving into aged care accommodation.
“This data and the trends it reveals have important implications for super funds attempting to meet the needs of their members. It should feed into communication strategies, general and personal advice and product design. In this way, funds can meet the actual lifestyle needs of their members.”
Greg Bright is publisher of Investor Strategy News (Australia)