There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

In my experience, there have been many discussions on an appropriate method to determine an initial level of spending. However, there has been little debate about how retirement spending may change as individuals progress through the active, passive, and frail stages of retirement. I believe this is an equally important consideration when it comes to retirement planning as it could have a significant impact on the level of savings required at the point of retirement.

Defining retirement spending categories

To understand how spending may change in retirement, let’s first consider categorising spending into different segments, such as:

• Clothing and Appliances

• Eating and Drinking Out

• Grocery and Food

• Health

• Housing Expenses (excluding rent and mortgage)

• Leisure and Entertainment

• Other

• Cash withdrawals

• Transportation

• Travel

• Utilities and Finance

It is essential to acknowledge that the amount a person allocates to each category at the onset of retirement is likely to change as they progress throughout their retirement years.

The evolution in spending may be influenced by the various stages in retirement: active, passive and fragile.

During the active phase, individuals may allocate a larger proportion of their expenses to travel, transportation, and leisure activities, which may decrease as they age. Conversely, certain expenses, such as healthcare, may increase as they grow older.

When assisting individuals to understand how their retirement spending might change during retirement, it’s crucial to comprehend their initial spending and potential adjustments. One approach is to examine how spending patterns correlate with an individual’s socio-economic status, as this may often reflect retirees’ lifestyle choices and spending tendencies.

Identifying retirement spending patterns

This section considers how spending in retirement varies for different age bands by analysing digital banking spending data from Australian individuals aged 60 and over.

This data was extracted from the Compare My Spend tool on the Spirit Super website.

It is important to note that the data looks at the spending of individuals at a single point in time across multiple age bands and it is not a longitudinal study looking at the spending of a single group of individuals as they progress throughout different ages.

The data is categorised by age bands (60–64, 65–69, 70–74, and 75+) and affluence levels (Low, Mid, Mid-High, and High). The affluence levels are defined based on individual spending on different categories and spending behaviour. This categorisation helps identify any distinct spending patterns that might be visible in the data.

Using the 2022 banking spending data, the above chart looks at the percentage change in retirement spending, using the age 60-64 age band as the base year, and considering the relative decrease in retirement spending for older age bands.

The chart illustrates for all affluence levels there is a consistent reduction in spending across the age bands. In the ‘low affluence’ group, individuals aged 75+ spent approximately 15% less than those aged 60-64. This reduction is even more pronounced for the higher affluent levels, with spending at age 75+ band reducing 20-25% of the spending levels observed at age 60–64.

Are you confident in your retirement planning? If you're uncertain or need guidance, please reach out to us for expert financial advice. We can help you develop comprehensive retirement planning and spending strategies to ensure a secure and comfortable future.

Original source: https://beta.morningstar.com.au/insights/retirement/249408/how-retiree-spending-plummets-as-we-age

General Advice Warning:

The information on this website is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product.