Chris Forrest- Senior Partner and Principal Adviser
Sovereign Wealth Partners
A new study claims the financial services sector may have underestimated the drop off in retiree spending as they age.
Everyone has their own patterns of spending and Sovereign works with clients on their personal circumstances to empower them with confidence in their retirement. The power of a study such as this is to illustrate that some behavioural themes are universal and should be incorporated into planning for what is achievable today without compromising the future.
The findings are the result of the Milliman Retirement Expectations and Spending Profile (ESP) which is based on the actual spending of more than 300,000 Australian retirees.
Key findings include:
- Median retired couples expenditure falls by more than one-third as they move from peak spending years (65-69 years of age) into older age (85 years and beyond)
- Decline in expenditure in the early years for couples is relatively stable at about 6%-8% across each four year age band (see chart below) but accelerates past 80 years.
- The top 75th Percentile of retirees aged 85-plus were still spending at or below the Aged Pension
The findings of this study potentially bring into question assumptions made on planning for retirement and design features of retirement income solutions such as:
- Linking retirement income to the consumer price index (CPI),
- The replacement ratio of pre-retirement income required – 70% is used by the Organisation for Economic Co-operation and Development (OECD)
- CPI as a valid measure or target of performance of retirement investment solutions
The findings question other conventional wisdom – the Association of Superannuation Funds (ASFA) has previously estimated a “comfortable” couple aged 85+ years will spend about 7.8% less than those aged 65-85 years. The Australian Institute of Superannuation Trustees (AIST) based on Household, Income and Labour Dynamics in Australia (HILDA) data, has suggested that spending may not decline materially through retirement.
The Government’s MyRetirement framework is the outcome of the Murray Inquiry (Financial System Inquiry) which recommended that “Comprehensive Income Products for Retirement”, or CIPRs, be developed to increase the standard of living in retirement and achieve the purpose of the superannuation system (to provide a retirement income). In May 2017 the Australian Government Actuary released its certification test outlining the minimum requirements CIPRs must meet – one of these was that the constant real income delivered by CIPRs is indexed to CPI. The Milliman study show that retirees’ overall cost of living does not increase in line with CPI.
The study claims that perhaps a more precise picture of essential needs and discretionary expenditure may lead to more targeted products to address real concerns. Recent Australian Securities and Investment Commission (ASIC) research into the views of older Australians found five key worries:
- Paying day-to-day bills and expenses (78%)
- Having enough money to enjoy life and do what they want to do (69%)
- Making sure they can access money for emergencies or something unexpected (54%)
- Paying healthcare or medical costs (45%)
- Saving for a holiday or travel (42%)
What does it mean?
Retirees are holding money back for future years when they may never spend it. This may be due to a lack of confidence, less desire to consume or a combination.
Any surplus may well go to the kids, and to some, legacy is a priority. For others it may mean they are not getting the most out of their wealth when they have the energy and inclination to enjoy it.
Sovereign Wealth Partners helps clients understand what their wealth can truly achieve using our proprietary Sovereignty modelling software, giving clients the confidence to bring their wealth to life.
If you want to Make it Count, Sovereign Wealth Partners can help you. Contact us on:
Ph: (02) 8216 177