Right retirement spending balance needed

The partner of a mid-tier accounting firm has warned retirees to find the right level of spending behaviour so as not run out of savings, but also not to live poor and die rich.

In particular, HLB Mann Judd Sydney head of wealth management Michael Hutton has cautioned against a mid-retirement spending spree that might see individuals leave themselves unable to fund health-related expenses in years to come.

“We have noticed that after about a decade in retirement some retirees can be tempted to go on a spending spree,” Hutton said.

“It might be buying the luxury car they have always wanted, taking an extravagant holiday, and is often a combination of several different things.

“This is fine as long as they can afford it and as long as such spending does not affect their longer-term financial situation, including the quality of care they will be able to afford in their final years.”

According to Hutton, a common trap for individuals planning a large mid-retirement spending strategy is underestimating exactly how much money they will need to maintain a certain lifestyle in future years.

“Quality of life for retirees needing care can vary enormously. Healthcare costs can rise dramatically after the age of 70, so retirees shouldn’t assume they won’t need as much money as they get older and more frail,” he noted.

“Retirees need to take these anticipated costs into account if they want to retain control of their home and long-term lifestyle.”

He pointed out retirees would want to also consider any relationship conflicts a larger spike in spending might cause.

“They should also be aware that going on a spending spree can lead to family conflict as, although it’s not their money, children sometimes get upset if they think their parents are being foolish with their spending,” he said.

At the same time, Hutton noted retirees should not deliberately not spend money because they felt guilty about spending what is perceived as intergenerational wealth.

“At the other end of the spectrum, we also see people in retirement who are scrimping and saving in order to leave as much as possible to their children. Sometimes their children are giving them a hard time about their spending because the children already think of the money as theirs,” he said.

“Effectively, some people are living poor but dying rich because they aren’t comfortable about their financial position, or else it is not well structured – for instance, their wealth is tied up in illiquid assets such as property.

“The aim for retirees should be to achieve a happy balance between enjoying life now but also making sure there is enough to cover their future medical and support needs.”

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