How much do people really spend at each stage of retirement?

As people head into retirement, most start to dream about the exciting years ahead then try to put it into a financial plan. But they don't know what pattern of spending to base their plan on.

In this weekend edition

This is the short Sunday email, designed to bring you today’s article from The Sydney Morning Herald, The Age, WA Today and Brisbane Times.

This week’s article is timed super-well with a podcast we released with Aaron Minney - Challenger’s head of Retirement Income, talking about how to predict and plan for your spending in retirement. I’ll put more info on it below.

I have thrown in a doozy of a letter too… because you love them so much! (Send me more please!!)

And don’t forget - the Early Bird pricing of 50% off our How to Have an Epic Retirement Flagship Course ends on the 4th of March at midnight. No exceptions. So please take advantage of the good deal. I ordered 12 cases of the new edition of the book for our already-booked attendees on Friday. That’s how epic it’s going to be! I can’t wait. 8 days to go til kickoff! Download a brochure and book your place here.

Have a lovely Sunday. Make it epic!

Many thanks! Bec Wilson

Author, podcast host, columnist, retirement educator, and guest speaker

How much do people really spend at each stage of retirement?

As people head into retirement, most start to dream about the exciting years ahead and the years that they will age through then try to put it into a financial plan. Rarely, if ever, does anyone reflect on their plan to see if their strategy was correct.

They simply live out their lives and adapt to the circumstances that present themselves. But for those who are planning how their money might work, a discussion on retirement spending and whether it still works the way history tells us is worthwhile.

The financial planning framework most people use was defined back in the 1960s, and it suggests that we should plan to spend smoothly across our lifespan. Bengen’s 4 per cent rule, released in 1994 and still widely used in planning, recommends that people will want to spend 4 per cent per year of their initial wealth at retirement and that this will need to be increased with inflation each year to live a comfortable retirement.

The second and perhaps more interesting theory was released in 2014 in the US by Blanchett. It suggests people actually spend more in the first years of active retirement; then spending tapers off as we become settled in a phase they call passive retirement; then again as we become more frail.

And, when you apply this framework to Australia, the latter two phases usually have lower costs simply because the majority of medical and care costs can be covered by the government.

Seems logical right?

Well, some smart researchers from Challenger have taken a deep dive into the actual spending data of Australians captured by various government surveys over their retirement, and they pose a different approach to planning your spending off the back of it.

It drives you to really think about what you want to spend over your retirement years and how you think your pattern of spending will work, rather than going off historical assumptions.

They’ve combined the data from a number of key sources, to look at real household spending data across 60-80 year olds in retirement. And they think that people are actually spending fairly consistently over their whole retirement, similar to Bengen’s recommendation, and that Blanchett’s theory is playing out simply because of a generational spending gap.

They believe the cause of lowering spending data in older people could be simply that older generations have traditionally spent less than more modern generations, skewing older age data. And they point out that current generations are seeing their expenditure maintain or even increase as they age – a contrast with Blanchett’s conclusion.

It’s in the discretionary items – or the “wants” – where the differences in spending are seen over retirement.

According to the head of research at Challenger, Aaron Minney, it all comes back to needs and wants in retirement – and you need to think about both separately.

Your needs being the everyday expenses that allow you to reach your minimum desired standard of living. And your wants being the goods, services and experiences that are not consumed every day, and can be forgone if you choose, to lower your costs.

Their data on household spending shows that people spend fairly consistently over their lifetime on regular essentials or their needs. Their data points out that there is a cohort of more recent retirees spending more on living expenses and that based on previous cohort spending insights, they are likely to maintain that lifestyle spending throughout their lifetime.

Minney points out that when you look at people of different age groups, you are, in fact, comparing younger retirees with an older cohort that locked in much more modest lifestyle expectations earlier in their retirement, and carried that spending behaviour all the way through.

They did not spend more on their needs earlier in life. But younger retirees are starting retirement with more financial resources and higher expectations of everyday living.

Read the rest of this article, on The Age, The Sydney Morning Herald, Brisbane TImes and WA Today.

'How much can you really afford to spend each year in retirement?' with Aaron Minney

Today we're talking about spending in retirement, covering two topics - the ways people phase their spending over retired years and how much on average people can afford to spend each year.

In episode 14 we talk about ‘safe spending’ or how you calculate the amount you can afford to spend, based on your super balance at retirement if you want your super to last to your life expectancy or a little beyond.

We also talk about spending patterns in retirement, and the various different ways that people plan their annual spending budget to work over their lifetime. To talk about these tricky and interesting topics, we have Aaron Minney, the Head of Retirement Income for Challenger, who for 12 years has been researching ways to generate income from investments in retirement. 

This is a topic that anyone approaching or in retirement with a fear of running out of money will really enjoy.

And on the Prime Time newsletter this week we provide you with a really helpful and detailed ‘safe spending’ analysis, thanks to the team at Challenger who have done the calculations. So head over there to see the tables.

Listen now

LISTEN HERE - LATEST EDITION (E14) - OMNY, or listen on APPLE PODCASTS or SPOTIFY PODCASTS 

According to Aaron, there’s a simple way to work out how much money you can SAFELY spend in retirement. There’s also some good insights into the way people actually spend their money in retirement, and how you can draw on these patterns to prepare your budget for the future. And, this is changing as the baby boomer steps to the fore with larger super balances.

Just one long question today!

Hey Bec! Just wanted to share a bit about why I don’t seek out a financial advisor, I reckon it might resonate with others.

So, the main reason I don't feel comfortable to go see a financial advisor is that they often push you to switch your super funds to what they recommend. I'm pretty happy with my current fund, it even got some Canstar awards. But when we saw an advisor last, she was all about switching funds. When we decided not to, she kind of dropped us. And, the fund wasn’t well known and I couldn’t find much on it back then. It was a few years ago now, back in the middle of the banking royal commission, but it’s left a bad taste.

The other thing that bugs me is the cost. The advisor we saw charged $3,500, and I hear it's even more now. Seems like after the Royal Commission, there are fewer advisors because it costs them more to follow the new rules.

What do you think? Regards, Nolene

Hi Nolene, You’ve actually pointed out a couple of really big concerns of mine. And I’d like to separate them if we can. Many people are afraid of financial advice. I’d rather you be cautiously optimistic that it’s changed. You as everyday people don’t get to see the inside runnings of the industry, but increasingly, I do. And hopefully what I see can help build your confidence and provide some logical points of reference.

1. Trust: The financial advice industry has done an extraordinary amount of work to improve their trustworthiness. No industry is perfect - but they are MUCH better. So I don’t want you to fear financial advice anymore. I personally believe EVERYONE needs a little help in the run up to retirement from a financial adviser. Not all people need independent advice though. If you have a pretty simple financial situation - super, home, salary, maybe a few savings, and you’re happy with your super fund you might want to go and seek out the financial advice offered by them. Most have intrafund advice (advice on how to invest your super) on offer for free, and some have quite comprehensive advice offerings at low fees. I doubt they’ll recommend you leave their fund - but they’ll look at how you’re invested, help you navigate pension eligibility and point out smart opportunities to prepare for retirement for sure. Remember you can always start here, then step up to independent advice if you feel you still need it.

2. Super fund switching recommendations: I do think everyone should be wary of the issue you point out but in 2024 it wouldn’t be for the same reasons. Financial Advisers are not allowed to take incentives for putting people in financial products anymore. In this era, many advisers have ‘recommended product lists’ which simply mean their firms have conducted research and pre-approved the list of investment structures and providers they ‘prefer’ to offer you - for compliance and supervision reasons. Your fund might not be on their preferred choice. It certainly does not mean it is bad or you have to move. It might just mean they don’t review it as a firm. For anyone being recommended to move, you should ask a lot of questions to ensure the reason for switching is valid. Ask them why - directly. If you don’t get an answer - ask again. And, do your homework. You’ll want to understand the long term returns of your fund, and the fund they are recommending, and the fees charged on your level of balance on both too. And, consider some of the benefits offered by each fund. Some might offer more advice (or less), have different types of investment options, and some might even offer you better education, something that is close to my heart.

3. The cost: If you want to get truly independent financial advice you will have to pay for it. The Moneysmart website suggests that financial advice should be expected to cost from $4000 to $6000 for a comprehensive financial plan and the advisers I talk to concur. The other thing to consider is whether you can just manage with one-off advice, or you need ongoing advice (not everyone does - really!). There is indeed only 16,000 advisers left in Australia, and what drives the price up - two things - scarcity and the complexity! But changes are a coming. The government is reviewing how the sector works, and pushing forward with allowing banks and super funds to offer more comprehensive advice. That will be a big help allowing everyday people to access simple advice much more cost effectively.

A long answer I know - but noone should be afraid of getting some financial advice in 2024. You just need greater insight into how the sector is changing *present tense* it isn’t fully where it needs to be yet in my opinion!. Bec Xx

Got a letter for me? Email it to rebecca@epicretirement.com.au.

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