The rate of spending by retirees dramatically decreases as they age, more so than widely accepted, suggesting that existing retirement spending models need to be reappraised, according to the latest analysis from actuarial research firm, Milliman.
According to the Milliman Retirement Expectations and Spending Profiles (ESP) report, an average retired couple’s expenditure falls by more than one-third (36.7 per cent) as they move from their peak spending years in early retirement (65-69 years) and into older age (85 years and over).
These findings are in contrast to the Association of Superannuation Funds of Australia (ASFA), which estimates that a ‘comfortable’ couple aged 85+ will spend 7.8 per cent less than those aged 65-85.
However, Milliman’s analysis of over 300,000 Australian retirees found the spending for couples was relatively stable in the early years of retirement, starting at age 65 and then dropping by 6-8 per cent every four years, and then rapidly decreasing after age 80.
The research also found that:
- the food expenditure of retirees declines steeply with age;
- health spending increases with age but dips again after age 80; and
- discretionary spending, like travel and leisure, steadily declines throughout retirement.
The results of these findings imply that retirees who hold money back for future years, may never spend it. The research also undermines common practises, such as linking pension products to a rising consumer price index, as well as industry assumptions, such as the 70 per cent replacement ratio for retirement income.
According to Milliman, the faster-than-expected drop-off in spending by retirees casts doubt on some common industry perceptions, such as aiming to save enough superannuation to replace a set percentage of pre-retirement income.
The analysis suggests that retirement planning strategies may need to be re-examinded, particularly for many retirees who opt to take their super as an allocated pension and then draw down the minimum income, thereby under-spending during the early years of retirement when they are most active.