The latest analysis into retirement trends has revealed the financial services industry may have underestimated the dramatic falloff in retiree spending as they age.
The Milliman “Retirement Expectations and Spending Profiles” analysis, which used real world expenditure data, found the median retired couple’s expenditure falls by more than 36.7 per cent as they move from their peak spending years in early retirement, 65 to 69 years of age, and into older age, 85 years and beyond.
The decline in expenditure for couples is relatively stable in the early years of retirement at about 6 per cent to 8 per cent across each four-year age band, however, then rapidly accelerates once retirees pass 80 years of age.
The revelation undermines common practices 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, the analysis said.
The result is many retirees are holding money back for future years when they will never spend it.
The Association of Superannuation Funds of Australia (ASFA) has previously estimated a “comfortable” couple aged 85-plus years will spend about 7.8 per cent less than those aged 65 to 85 years of age.
Another industry study by the Australian Institute of Superannuation Trustees based on household, income and labour dynamics in Australia data had suggested spending may not decline materially through retirement.
However, the Milliman analysis is the first based on the actual spending of more than 300,000 Australian retirees.
“The faster-than-expected drop off in spending casts doubt on some common rules of thumb, such as aiming to save enough super to replace a set percentage of pre-retirement income and suggests a more nuanced approach,” it said.
“Older Australians are bombarded with broad brushstroke messages about how much they need for retirement … at worst, it could mislead retirees who then underspend during the early years of retirement when they are most active.
“We know this is an issue for many retirees who opt to take their super as an allocated pension and then draw down the minimum income.
“Financial plans and products should reflect these expenditure changes over time, as well as the greater risks, such as market downturns, and uncertainties, such as health events, that retirees face compared to the broader population.”
The Milliman analysis provides a baseline for how retirees are likely to behave in future and as such has the potential to influence how the financial services industry can provide more tailored advice and products that boost engagement and genuinely improve retirement lifestyles.
