The current economic climate has been described as a ‘crisis’ by incoming Treasurer, Jim Chalmers. Whether rising prices and interest rates do indeed constitute a crisis is arguable. But it’s fair to say that most Australians are very concerned about the rapidly escalating costs of fuel, food, energy and other household essentials. As my father used to say, they are grabbing both pockets at once.
Are you spending too much or too little? How might you even think about spending more when prices are rising so rapidly? Surely you’ll run out of money sooner rather than later?
Probably not, the research tells us.
In fact most retirees pass away with very high assets – and a high proportion have lived a very frugal life in retirement to do so.
Yes, you may well wish to leave an inheritance. But do you really want to shiver through every winter and do without life’s little comforts to hand it all over to your nearest and dearest?
To better understand spending in retirement, a good start is knowing why people might err on the side of spending too conservatively. There are many for reasons this, but the most common are:
- Concern about rising prices and the ability to maintain your current lifestyle
- Worries about running out of money and being forced to live solely on government support
- Concern that future medical expenses and/or aged care needs will be very expensive
- Desire to leave an inheritance
- Lack of clarity on what a ‘safe’ level of personal spending should be
- Complexity of rules and difficulty in doing the sums to measure spending needs
If you can relate to one or more of these reasons for ‘grabbing both pockets’ too tightly, you are not alone. The 2018 Money in retirement: more than enough’ report by the Grattan Institute found that almost half of Australian pre-retirees consider it unlikely they’ll have sufficient money to live comfortably in retirement. But once in retirement the situation is very different, says Grattan, with most Australian retirees living on more than 70% of their pre-retirement income, a measure used by the Organisation of Economic Development (OECD) as a comfortable retirement outcome.
Remember also that retirement spending is never static. It is closely related to your age, stage and how active you are. New retirees typically spend more on big items, such as a new car, extended travel and home renovations. Older, less mobile adults often spend only on accommodation, food and personal needs.
It’s also helpful to remember that super was never intended to become an estate planning vehicle. Its legislated purpose was to fund the retirement years.
The critical question is how can you review your spending and know if you can spend more?
There’s a lot at stake here as any retiree will tell you, so we’ve put together a helpful checklist to guide you through the major considerations. We believe the best way to tackle this tricky topic is to take time out for an annual personal financial review. The results from these deliberations can then be shared with professionals. Apart from good health, being comfortable that you are living within your means is the cornerstone of an enjoyable later life. So let’s get started.
We suggest you start with the six key components to retirement spending and that you consider each one separately. They are:
- Your health
- Current and future accommodation
- Your income
- Essential expenses
- Discretionary spending
- Travel and other bucket list aspirations
And here are some useful questions to ask so you can check if current spending is in tune with your evolving needs. Hopefully it goes without saying that this review should be done with any significant other in your life.
We start with health, as money matters far less if your health is so bad you can’t enjoy it. If you are fit and healthy and your overall health outlook is good, it may be that you will spend less, rather than more, on medical care than you think. According to the most recent ASFA Retirement Standard, comfortable couple retirees spend about $200 a week on medical expenses, modest standard retirees and comfortable singles spend about $100 a week and modest standard singles spend about $50. So if you are scrimping in the fear that you will need many thousands more, you may be overdoing the frugality. Conversely, spending money on your health and fitness (nutrition, exercise, meditation, retreats) is both smart and enjoyable.
Current and future accommodation
Many retirees choose not to downsize, rather they wish to age in a family home that has stood them in good stead for 30 years or more, in a neighbourhood they know well. This is a lifestyle choice that makes a lot of sense. But there are two issues to think about. The first is that you may be funding a property that is way too big for your needs and your money is going on heating, lighting and maintaining a property that is only partially used. The second thing is that there are many ways to make your home more suitable for your current age and many ways to make it more sustainable or energy efficient. For instance, current estimates suggest that a switch from gas heating to electricity could save in the order of $2000 -$3000 a year.
Confirming your actual income over the past 12 months is an excellent reality check – as well as necessary information for what follows. We all think we earn a certain amount, but can easily under or over estimate the total.
Charting your spending on essentials is the bedrock of good financial income management. It is only by knowing what you have to spend every month that you can do the sums to see what is left to spend on discretionary items. There are many handy tools you can find online that can assist you with budget tracking. And don’t forget that you don’t have to accept your current level of essential spending on any item. There are excellent comparison websites that will help you switch providers in insurance, loans, credit cards and super funds. Apart from comparing and changing, you can also negotiate with your current provider. It is interesting how quickly basic fees and charges can be discounted if your provider thinks that you are about to make a move. Another money saving strategy is to review all insurances. You may have income protection insurance automatically included in your super fund. Do you still need this? Your home contents may be over insured, as may be your building. Similarly your medical insurance may provide cover for items or levels of support that you no longer need. Examine every detail – there are often significant savings waiting to be made.
This refers to recurring expenses that you don’t have to make but enjoy doing so. The daily coffee, the weekly dinner date, movies, presents for friends and family, new clothes, entertainment, décor – the list goes on. There’s no need for guilt here. What you’ve spent is past. It’s what you now know you can afford to spend that’s relevant. If you wish to maintain your current level of discretionary spending – but it’s higher than the difference between your income and your essential spending – then you have some decisions to make. You can either review and reduce your discretionary spending, increase income, or consider equity release if you own your own home.
Travel and other bucket list aspirations
Yes, the financially savvy will know that money spent on travel and experiences is also discretionary. But we’ve deliberately given your bucket list ‘to dos’ a category of their own, as life is not only about what we have to do, but also what we hope and want to do. The extra time that retirement gives us is there for a reason. It allows us to do the things we always wanted to, without the morning alarm dictating otherwise. Your bucket list may include extended Australian road trips, cruising tropical oceans, European jaunts, trekking in South America or African safaris. You may also want money for the car of your dreams, a dedicated home office, a tiny home or one thousand other things. So honouring these dream purchases makes a lot of sense. The work you’ve done on your spending is hopefully reassuring. and you may have learned that your aspirations are entirely affordable – or encourage you to pursue strategies to fulfill these dreams at a future date.
You’ve done the sums, what next?
Whether you can spend more or need to trim your outgoings, there are many strategies to maximise entitlements, increase income or to save more money. There are also ways to confirm if you can comfortably spend more.
One of the most powerful tools that Retirement Essentials advisers use is our Retirement Spending Guide. This is available for all registered members to use at any time.
But many of our members have found it more effective to work with an adviser in a one-on-one consultation. Having confirmed your essential and discretionary expenditure, you can see ‘in real time’ how small adjustments to your outgoings will affect your long-term financial health.
What could be more reassuring than that?
If you, too would like to better understand the ‘other side’ of your retirement income equation, why not book a consultation with one of our experienced advisers today, and set your mind at rest about how you can manage your money now and in the future.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.