As retirement progresses, your spending will change

Living longer than previous generations comes at a price.

How your spending will change

They say nothing is certain in life, other than death and taxes, and this is never more true than when it comes to how you will spend your money in retirement.

While income shocks can happen at any stage of your life, the older you are, the larger their potential impact on your budgets.

Although no one has a crystal ball to ascertain which unexpected costs will crop up later in life, YourLifeChoices current Retirement Affordability Index and survey do shine a spotlight on how retirees can anticipate their likely spending through the three chapters of retirement.

Our ongoing analysis of the various retirement tribes reveals that one of the biggest influences on a budget is a retiree’s home-ownership status.

Unsurprisingly, older Australians who have to rent and rely on an Age Pension have the biggest financial struggles in retirement.

According to this latest Retirement Affordability Index, an affluent couple who own their home and have private income, spend just 13 per cent of their costs on housing. But a cash-strapped single renter on the Age Pension has to allow almost three times as much – 36 per cent – as a proportion of their budget to pay for housing.

Another major factor that influences living costs is whether the household is occupied by one or two people. A couple who own their home and are on the Age Pension have to set aside 13 per cent of their budget for housing costs, whereas a single aged pensioner who is a homeowner needs to carve out 20 per cent of their funds.

The level of spending also varies widely depending on whether a retiree’s main source of income is from private investments or an Age Pension.

For instance, an affluent single person with private income only has to set aside 14 per cent of their funds for food, whereas a single aged pensioner needs to put aside 17 per cent of their income to feed themselves.

The circumstances that led to the retirement is another determinant of spending patterns going forward. A surprisingly low number of people clock off from work because they want to retire. Mostly, leaving a job for good is not a choice made willingly.

YourLifeChoices data collected from our Insights Survey earlier this year reveals that health reasons are the number one reason nearly a third of retirees had to stop working. Just eight per cent retire because they have reached the official retirement age. Almost a quarter are forced to stop earning a crust because there is no work available with only 27 per cent reporting they retired because they had reached a level of financial comfort that did not require them to labour for longer.

It’s worth noting that the different phases of your retirement will determine how freely you can spend.

In the last Retirement Affordability Index, the founder of My Longevity, David Williams, citing statistics from the Australian Institute of Health and Welfare, described the three chapters of retirement and how spending categories evolve as we age:

• the disability-free years

• some disability but independent

• dependent

It is these three stages, as well as the circumstances for retiring and the income available that determine how spending changes as retirement progresses.

If an individual retires due to a lack of work or ill health and has little or no savings, relying on an Age Pension will ultimately mean that years in retirement, regardless of the three stages, will largely be spent trying to make ends meet and cover costs.

However, should there be disposable income to hand, then retirees in the first stage of retirement are more likely to travel, pay off the mortgage, renovate, update an older vehicle and generally spend more on their lifestyle.

As health issues arise and the second stage is entered, then medical costs will most likely increase.

Also, any discretionary spend is more likely to be used to maintain a level of independence so there is a need to make changes to accommodation and pay for services that enable people to stay at home.

And when someone enters the dependent stage, then the bulk of their expenditure will be on health-related bills.

This, unfortunately, is the big sting in the tail for those with increasingly longer lives. Their spending habits will morph from lifestyle ‘wants’ into essential ‘needs’; keeping up with medical and pharmaceutical bills, occasional hospital admissions and towards the end, nursing home fees.

Making an effort to understand the effects of each chapter in your longevity, will ultimately enable you to take more control and plan more effectively.

However you approach it, planning for how you will fund your needs in what is likely to be a long life is key to avoiding the mistaken belief that your old age will mirror your parents’ experience. Retirement is no longer a set-and-forget proposition. In particular, understanding the true costs of aged care well before it is needed, may help you plan suf?cient savings for this later stage of your life.


    To make a comment, please register or login

    22nd Apr 2018
    In my 20s I saw many old people struggling on just the old age pension and I wanted to make sure I was going to save money towards my old age. But in my 50s I started to realise that the Govt kept changing the rules and I saw myself losing the pension altogether on my current track. So all the overtime and weekend work got knocked back and I retired at 58
    using my own finances. Managed to get a part pension and the precious blue card. Having a look what's happening to the self funded people I know I made the right decision. No financial planner would have advised that route! All depends whether you want to be a rich person in the final resting place.
    22nd Apr 2018
    I went further Cowboy. I retired at 30, sold up everything, bought a yacht & spent 8 years sailing the Pacific islands. I did regularly pick up work along the way, so not a total bum.

    Came back at 38, with a tired old yacht & not too much money. Worked hard & owned my home by 52. Chucked out of the work force at 62, there is not a lot of money, but if I had to eat potatoes & live in a chicken coupe, I would still be richer than most with my memories & friends all over the Pacific, & now spread around most of the world.
    22nd Apr 2018
    Good on you, Hasbeen! Also spent a lot of time in the Pacific myself
    as well as in Africa. At 30 that would have been great for sure. Enjoy your retirement as I know you will.
    double j
    22nd Apr 2018
    Well done Has been , we just sold our yacht after a decade of blue water sailing with some of the most wonderful memories and friendships to last a life time but we didn't stop there because we now travel Australia , East and West Europe plus more in our mobile home[s] which we have owned for 8 years Our crystal ball says we have a few more years of '' disability free years '' left, at lease until 2025 when I will be 75 years young

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