The living costs that could hurt your retirement

Australia Institute senior economist Matt Grudnoff dusts off the crystal ball to help you budget for a 20 to 30-year-plus retirement.

The living costs that could hurt your retirement

The problem with the future is that it’s notoriously unreliable. If it weren’t, then planning your retirement would be easy. But given the future is as reliable as a politician’s promise before an election, we need to make more guesses than we’re necessarily comfortable with.

In order to estimate how much money we should have before we retire, we need to know how much products and services will cost in the future. Predicting future prices is easy if we’re talking about next month or next year, but for those approaching retirement or who have just retired, it can mean looking 20 or 30 or even 40 years into the future.

How can we estimate costs that far ahead? One way is to look at what has happened to prices in the past. If this were an industry super advertisement, a man speaking in a very fast voice would be saying: “Past performance is not an indication of future performance.” But, much like the super ads, I’m going to assume that you will completely ignore that warning and I’ll base the bulk of my predictions on past performance.

Let’s wind the clock back 21 years to June 1998. Sex and the City premieres on US television and The Truman Show, starring Jim Carey, is released in cinemas. If you retired in June 1998, there is a very good chance that you’re still alive (particularly if you’re reading this now). But the prices of many things have changed significantly since then.

While people talk about how the cost of living has increased, we know that all prices don’t increase at the same rate. Some things go up faster and some things have even dropped in price.

Since June 1998, the Consumer Price Index (CPI), or the average price of a basket of goods, has increased by about 70 per cent. Some goods have gone up a lot faster than the average. The top five are shown in the figure below, along with the CPI.

We can see that the biggest price increase has been in tobacco products. In fact, tobacco products have gone up more than twice as fast as the next biggest increase – domestic fuel and power. The reason for this almost six-fold increase since June 1998 is, largely, taxes.

The take-out message from this might be if you’re planning to retire and smoke you might want to put more money aside, because smokers are likely to continue to be heavily taxed. Of course, given that smoking increases the likelihood of an early death, you might not need to put away as much as you think.

The increase in tobacco products is distorting our graph, so let’s take it out so we can better see what is happening to our other biggest movers.

We can see that the next biggest mover is domestic fuel and power. This is dominated by the price of electricity and natural gas. Is this likely to continue to increase in price? The reality is that most of the increase has been due to bad regulation (gold plating of the networks) and a lack of energy policy leading to a reluctance to invest in new generation.

In order to know what will happen to energy prices in the future, we need to predict how politicians are going to act and that’s not easy. What is easier to predict is the continuing fall in the price of solar, wind and storage. These new technologies are likely to push down the price of electricity. High energy bills can also be offset – if you have some money on hand – by installing solar panels.

Education is the next biggest increase, and while that’s likely to affect your grandkids, it’s less likely to have an impact on your costs in retirement.

Medical care is a completely different matter. This is likely to become a bigger component of your spending as you age. It’s also likely to continue to increase in price as we invent new and ever more expensive ways to extend our lives. Private health insurance might seem like a way to hedge the costs, but as health costs rise, private health insurance is also likely to go up in price.

There is a strange perverseness to the cost of healthcare in retirement. The more we improve our health, the more expensive it becomes. And as we succeed in living longer, the cost of retirement continues to rise. While everyone, including the government, likes to complain about it, there is unsurprisingly not much appetite to cut back on healthcare.

The last big price mover is housing costs. This one suffers from poor government policy. Are rising house prices good or bad? Ask that of your local politician and you can rest assured you won’t get a straight answer. If you own your home, then you’re more likely to think rising house prices are good. If you don’t, then you’re more likely to think they’re bad.

The same applies in retirement. If you own your home, then rising housing costs are less likely to be an issue. But if you don’t, then this, more than any other factor, is likely to put you under financial pressure.

The increasing cost of housing is unlikely to change unless we have wholesale change in government policy to treat housing as an essential service rather than as a tax preferred investment opportunity. The other, far worse, event that would improve housing affordability is a recession that forces distressed, heavily indebted households to sell causing a big fall in house prices. Policy change would be much better than economic and housing market collapse.

In the categories that have seen rapid price increases over the last 21 years:

  • tobacco is likely to continue to rise as the government realises taxing smokers doesn’t cause much of a public backlash
  • domestic fuel and power is likely to moderate as we shift to newer, cheaper forms of power
  • medical care is likely to rise faster as we introduce more expensive ways to improve our health
  • housing costs are the biggest unknown because they depend on government policy and the state of the economy.

Not all prices have shot up since 1998. Some have increased at a much lower level than the CPI and some have even fallen. The four lowest price increases are shown in the graph below.

Amazingly, three categories have fallen in price since 1998 and are lower today than they were 21 years ago. They are communication, clothing and footwear, and household furnishings and equipment. Recreation has increased in price but only by about 22 per cent in 21 years.

Technology drove the fall in communication through the massive increase in the quality of mobile phones. Lower prices for clothing and footwear and household furnishings and equipment are a result of mass production in countries with low wages. Recreation was a combination of lower airfares and a fall in the price of computers, with personal computers in the recreation category.

How much will essential products and services cost throughout your retirement? That’s difficult to answer, but if the past is anything to go by, not smoking while owning a home with solar panels would have meant that you avoided the worst of the price rises. Things might be trickier for the next generations though, as home ownership rates continue to fall.

Are you tracking living costs in your retirement spending plans?

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     Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.


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    19th Jan 2020
    How do we factor in endless costs of living rises- why, simple - become a politician and get an indexed for life fat handout for life...

    Otherwise - we can't....

    While ever governments respective persist with their endless sellouts of our utilities, and with enslaving us into the 'global economy' that in reality benefits very few with barely a drop in 'trickle-down', the Average Joe/Jo simply cannot keep up with this vulturisation of a once fine nation.

    That, of course, is the plan - we are to be reduced to subservient, begging serfdom to benefit the mighty - Neo-feudalism will be the norm, and a return to the massively divisive 'master-servant' system will be the norm...

    If we, as a group, don't stop the rot NOW, and start by getting rid of governments that adhere to these outdated ideologies and Thatcherite rhetorical nonsenses - our grand0-children will be reduced to penury and will live under the despotism of abject and enduring poverty.

    You could always sell your daughters into the sex slave trade, and your sons could become rent-boy gender-benders... Asians will be able to take sex tours to Austrochine - the South Eastern Province of the New China Co-Prosperity Sphere... where they can eat dog fried in 'gutter oil' derived from straining and filtering gutter sh1t, shot wombats for fun, eat koala and other now-endangered specie steaks and so forth, while doing a guided tour of their possessions all across this once great nation....
    21st Jan 2020
    A bit pessimistic today, are we not? I can see the humor but there is also a corn of truth in it. Thanks for the laugh anyway.

    20th Jan 2020
    Well - this is a dead rubber, Igor, me old identical twin ... perhaps we should go elsewhere and perhaps seek some materials and equipment to help people rebuild after fires... can't get a rise out out THIS lot today....
    20th Jan 2020
    ...or maybe start the much-needed rebellion somewhere else.....
    20th Feb 2020
    Agree again with anonymous except start the rebellion right here !!
    20th Feb 2020
    Why does YLC always forget about council rates. They are a huge part of ongoing costs !!
    20th Feb 2020
    Totally agree. Mine are just under $3000. And that is most definitely not for a mansion on a huge lot in an upmarket suburb, and that is with the pensioner bonus.
    20th Feb 2020
    mine are now well over $4K per annum and is an average house.
    20th Feb 2020
    What about one of the biggest expenses, FOOD? Every time I go into a supermarket some item has gone up again and it's not just your 2% but often 10-20%! Is food not counted? The CPI is meaningless to me since it seems to bear no resemblance to the real cost of living rises I have noticed over the last decade. Right now I can see lots of price increases as our A$ is depreciating quickly against all major currencies, particularly Asian ones, which is where a lot of our food stuffs come from.
    20th Feb 2020
    What about one of the biggest expenses, FOOD? Every time I go into a supermarket some item has gone up again and it's not just your 2% but often 10-20%! Is food not counted? The CPI is meaningless to me since it seems to bear no resemblance to the real cost of living rises I have noticed over the last decade. Right now I can see lots of price increases as our A$ is depreciating quickly against all major currencies, particularly Asian ones, which is where a lot of our food stuffs come from.

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