Retirees spending less than the Age Pension, even though they can afford to spend more.
Australian retirees are spending less than the Age Pension each year, even though they can afford to spend more, according to an analysis of more than 300,000 retirees by an Australian financial firm.
The research found that more than half of those surveyed spend less than the equivalent Age Pension income.
Even those who are receiving a part-Age Pension or who are entirely self-funded are also being quite frugal with their funds.
Jeff Gebler, senior consultant at actuaries firm Milliman, says it’s not just the fear of running out of money before they die that drives such frugality, it’s more a case of covering immediate costs or the possibility of other unexpected expenses in the short term.
“Covering unexpected expenses like future medical bills and residential aged care also worries them, and they are reluctant to spend their superannuation too quickly. The result is that many retirees are holding money back for future years when they will never spend it,” said Mr Gebler.
Even many retirees who treat the Age Pension as a safety net probably won’t spend it all, preferring to save it instead.
“Rationally, they should have no need to self-insure by keeping part of their Age Pension payment. If your only source of income is the Age Pension, it’s a guaranteed, inflation-linked income stream. They are protected from inflation and investment risk,” said Mr Gebler.
The data is raising “as many questions as answers” about the motivations behind retiree spending, prompting further queries about the efficacy of proposed comprehensive income products for retirement (CIPRs), plans to boost compulsory super contributions to provide a target of 70 per cent of income replacement in retirement, and the Government’s downsizing scheme.
Mr Gebler says that a deeper understanding of the motivations driving retiree behaviour is required before creating further policy.
“We’re only really scratching the surface in understanding what motivates people. Everyone is going to have different spending patterns, depending on whether they own their house or rent, their health, their needs,” says Mr Gebler.
“Retirees overestimate some expenses and underestimate others, and the likelihood of those expenses, because they have different perceptions of their needs and the risks they face; we see this spending data that surprises us.”
Nick Callil, head of retirement income solutions at Willis Towers Watson Australia, has his own ideas about what he calls the “cohort effect”.
“If we’re saying that spending declines as people get older because, say, people of 80 aren’t doing around-the-world trips, is that a cohort effect? Do today’s 80-year-olds have less money and so they’re going to spend naturally less anyhow because they’ve got naturally less to live on?” said Mr Callil.
“I think there’s an argument for the system to be based on expectations of a step-down spending pattern, in real terms, as people get older.”
YourLifeChoices’ own research conducted for the Retirement Affordability Index, also presents convincing arguments for how retirement spending may change with age.
While the findings of the Milliman research may be surprising to some, it may also provide an insight as to how retirees will utilise the Government’s new downsizing scheme which came into effect on 1 July 2018.
Some research suggests that about 74 per cent of retirees own their homes outright and, while they could sell the home and have more money for retirement, many are unlikely to do so due to a strong attachment to the family home, or to ensure that their children have some form of inheritance that isn’t necessarily ‘money’.
“Surveys of retirees suggest there isn’t really a strong preference for leaving money to their children, but then you see a revealed preference that suggests otherwise. It’s very common for the house to be left to the kids – people say one thing and they do something else,” said Mr Gebler.
He thinks the Government and finance sector may be “only just starting to understand that people’s reasons for not downsizing might not be financial.”
“People are driven by emotional or other decisions,” he said
Do you agree with these findings? Do you spend less than the Age Pension? Or do you regularly run out of money, with no recourse?