Even people with lots of money spend less as they age
Even people with lots of money spend less as they age
One of the most difficult decisions to make is how much to save for retirement. One helpful way to decide what to save is to look at what current retirees do with their money.
Australians tend to spend less after they retire. Even the wealthy eat out less, drink less alcohol, and replace clothing and furniture less often. Spending tends to slow at around the age of 70, and decreases rapidly after 80.
This fall in overall spending is mainly a result of lower spending on transport, recreation, food and furnishings. Retirees who own their home tend to have paid off the mortgage, and retirees no longer need to spend money on children or on work-related expenses.
Pensioners also spend less because they get discounts on council rates, car registration, electricity and gas bills, public transport fares, and pharmaceuticals. Public transport concessions apply to all retirees – not just pensioners. Retirees’ spending also tends to be lower because they have more time, and so cook at home more and eat out less.
They spend more on health care as they age, but Medicare largely shields them from the full costs. The modestly higher out-of-pocket costs they do pay are mainly due to rising premiums for private health insurance.
Not only do most retirees not draw down their savings throughout retirement, many add to them. One recent study found that the typical pensioner still had 90 per cent of what he or she retired on after eight years. Retirees say they actually feel more comfortable financially than the Australians younger than them who are still working. And retirees are less likely to suffer financial stress such as not being able to pay a bill on time. Even retirees who rent are less financially stressed than people who are working and renting.
International studies make similar findings. Reports using the British Family Expenditure Survey and The American Income Dynamics and the Consumer Expenditure Survey both found spending decreases into retirement. Another prominent US study found that real spending falls by around 1 per cent each year in retirement.
What this means for retirement incomes policy
Our analysis using the HES shows that retirees’ spending needs fall as they age, but not because they can’t afford to spend more, or in a way that leaves them unsatisfied. The fall in spending appears to reflect declining recreation and other discretionary spending as retirees age and their health declines. Meanwhile governments foot most of the bill for retirees’ rising health and aged care costs.
This means that calculations about the adequacy of retirement savings ought to be based on whether they are enough to maintain buying power (at best). Yet much of the existing Australian research assumes that retirees need to save enough to enable their incomes to keep climbing throughout their retirement, in line with general wage growth. Implicitly, these studies assume that a retiree needs to spend 22 per cent more at age 90 than at age 70, after accounting for inflation.
The result is that we overestaimte how much most people need to save to have a happy retirement.
Australia’s retirement income system doesn’t work for everyone. Senior Australians who rent in the private market are more likely to suffer financial stress than homeowners, or renters in public housing. Falling rates of home ownership among younger Australians mean more Australians will rent in retirement. A growing number of older Australians, including many women, are at risk of poverty and homelessness in retirement. And Australians who suffer from major shocks, such as forced early retirement due to illness, are not as well protected by our income support system as they should be.
These are the real challenges to ensuring our retirement incomes system lives up to its promises to all Australians. But more superannuation is not the answer.