Busting some retirement spending myths
Despite common myths, most retirees can afford to enjoy a higher standard of living by drawing on their assets, rather than just their income.
Whilst the increasing cost of living may be making retirement more expensive than ever, the Retirement Income Review[1] in 2020 highlighted that most Australians pass away with the bulk of wealth they had at retirement intact.
This may sound like something to celebrate; however, it means many retirees live in a ‘lifestyle deficit’, going without goods and experiences that could make them happier and more comfortable. That lifestyle deficit rests on three myths about retirement spending.
3 retirement spending myths
Myth #1: Retirees should live off their income, not draw on their capital.
Myth #2: Retirement spending follows a ‘smile’ pattern – high in early, healthy retirement, dipping in the middle years and rising sharply with health and aged care costs later in life.
Myth #3: Most ordinary Australians face a real risk of running out of money.
Feel free to enjoy yourself
The evidence suggests spending declines over the full arc of retirement[2]. The Australian Treasury agrees that spending “tends to fall or remain flat as people age”. This is true across generations and even among higher-wealth retirees, “suggesting falls in spending are due to preferences, not budget constraints.” However, it is still important to consider the potential cost of care as we age. Most people prefer to remain in the family home as long as possible. Being able to self-fund home care services until a government package becomes available (waitlists can be around 6-18 months) helps ensure retirees can stay in control of their care as they age.
The implications in the Treasury’s Retirement Income Report are clear – most retirees can afford to spend more, especially early on when health and medical conditions are less likely to slow them down.[3]
“The evidence indicates that retirees tend to hold on to their assets and leave significant bequests, even though surveys suggest people do not prioritise leaving a bequest. If people drew down more on their assets, they could have a higher standard of living in retirement[4].”
Talk to us about how a combination of growth-focused investing and good advice can keep you on course to achieve your retirement goals.
[1] Retirement Income Review. Australian Treasury. July 2020
[2] Exploring the Retirement Consumption Puzzle, David Blanchett, 2019
[3] The Retirement Income Review suggests many people overestimate the impact of health costs in late retirement. Health spending remains a relatively small share of total expenses in retirement. This is largely due to public expenditure on health absorbing much of the cost of ageing.
[4] Retirement Income Review. Australian Treasury. July 2020
Based on an article by AMP North north-retirement-space-why-6-is-the-magic-number-to-unlocking-retirement-spending-56249151
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