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Are we over-preparing for retirement?

Australians could be delaying their retirement for longer than necessary by overestimating their retirement spending needs and skipping over some key considerations of their working versus retirement life. 

Data from the Australian Bureau of Statistics indicates that while the average household spends $1,425 per week on goods and services, this decreases to just $888 per week for households with the reference person above 65 years old. Households with the primary person 75 years and over spend less again, at just $671 per week.

It’s simple really. If we don’t spend a set amount every year of retirement for the rest of their lives, do we need as much in savings as we think?

What the experts say

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According to Nathan Zahm, senior investment analyst at Vanguard Investment Strategy Group, while taking into account current spending patterns might be a good starting point when considering how much is needed in retirement savings, it is more important that individuals consider their monetary overall goals for the future.

“With the research we’ve done and when we look at individual behaviours in retirement, one of things that becomes immediately clear is that retirement is different for everybody,” he says.

He recommends those approaching retirement consider their retirement funds as divided into four main categories – basic living expenses, contingency reserves (or emergency spending), discretionary spending and legacy or bequest objectives.

Paint a full picture

Mr Zahm says whilst it is true that expenses such as transport and leisure activities might indeed decrease over time, household spending figures do not take into account savings needed as a safeguard against declining health or funds allocated to pass on to the next generation.

“What we see most often is, on the average, people will end up with what is called the retirement income smile,” he says.

“When someone initially retires, they may spend a little bit more because they are enjoying the fruits of their career and spending money on leisure and other activities. Then as they age, they may spend less and less due to declining energies, declining health and simply a desire to be at home.”

“But very late in life, we often see expenses increase, and potentially meaningfully increase, depending on what end of life care or aged care needs they have and how they want those to be serviced.”

“So, when somebody is going through that exercise of how much to spend in retirement, they need to think across all four of those facets.”

“Which of my expenses are non-negotiable, which do I really need to have for a safety net for contingency, what do I want to have on the side to pass on to the next generation, and then what does that leave for me to spend today on my own enjoyment.”

He highlights also that simply accounting for decreased household expenses when budgeting for retirement does not allow for any buffer should asset allocations be impacted by market movements. However, for retirees likely facing a lifespan of more than 30 years post-retirement, investment in growth assets is imperative.

“What’s important to remember about retirement is it’s a really long endeavor. For somebody entering retirement in their mid-60s today, a reasonable planning horizon really could be 30 years into the future. And when you’re talking about that horizon, you need to be thinking about using a meaningful amount of equity exposure, even though that comes with the associated levels of volatility,” he says.

“If you don’t have those growth assets, you really do run the risk of falling short of the objective.”

“A good rule of thumb today, taking into account where market return expectations are at, valuations and interest rates, a very typical retiree portfolio might be in 50 per cent shares, 50 per cent in fixed interest. A reasonable expectation on returns for a portfolio like that might be 4 to 5 per cent. Taking that into account when you’re making spending decisions and planning for the future is definitely an exercise that’s worth doing.”

Over-focus on spending

He says simply considering one’s spending becomes problematic when investments are factored in, as retirees must take into account associated fees.  

“The other important thing we recommend when someone is looking at retirement income is making sure they’re controlling the investment expenses of their portfolio.”

“If somebody needed a little over $800,000 in retirement savings to meet the ASFA (Association of Superannuation Funds of Australia) comfortable living standards, they would generally pay 50 basis points more in fees and so would need about another 10 per cent in their portfolio to achieve the same retirement income objective. So, they’d something close to $900,000.”

Overall, he said that while household saving was still an effective starting point for individuals beginning to think about retirement, it was important to acknowledge to avoid oversimplifying this complex financial stage.

“What we generally find is that retirement is very complex,” he says.

“Those types of gauges are great to start and I think it gives people something that is somewhat tangible and actionable. Particularly for those who are accumulating, it may be hard to visualise what is 10 or 20 years away and often these rules of thumb can be very helpful when setting out to plan how much do I need to save.”

Are we over-preparing for retirement?
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