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Why do most retirees spend less than the age pension?

More than half of Australian retirees are spending less than the age pension each year, raising significant questions about current retirement policy and super fund strategies. The unexpected finding, which is also affected by age and location, was revealed in Milliman’s latest Retirement Expectations and Spending Profiles (ESP) analysis of 300,000-plus retirees’ real-world annual expenditure.

It suggests mandatory and voluntary measures to boost super may not be enough to produce improved retirement lifestyles without a deeper understanding of the motivations driving retiree behaviour. The findings come as a particular surprise given the commonly used ‘50% of median income’ poverty line typically captures many retirees.

For example, the latest Australian Council of Social Service Poverty in Australia report estimated that 13.9% of age pension recipients were living below the poverty line. The OECD’s Pensions at a Glance 2015 report found a more pronounced issue. It ranked Australia second lowest on social equity among 33 countries, with more than one-third of pensioners living below the poverty line.

Common measures and targets for adequate retirement incomes (including the median income poverty line) provide a starting point for discussion, but the data suggests they can also mislead. Such measures fail to explain the motivations and experiences (given most surveys are statistically insignificant) of the majority of retirees who spend less than the age pension each year.

Are retirees attempting to self-insure against longevity risk?

Running out of retirement savings is a key concern for many people given that a 60-year-old man is now expected to live for a further 26.4 years and a 60-year-old woman for 29.1 years, according to the government’s 2015 Intergenerational Report.

This concern may be a driver for the substantial proportion of retirees with account-based pensions who draw down the minimum legislated annual amount.

Figure 1: Percentage of retirees drawing down their superannuation at the age-specific minimum rate, 2011-12a, b

However, the age pension, which can be viewed as a sovereign-backed perpetual lifetime annuity indexed to inflation, is traditionally viewed as a safety net rather than a discretionary income source for savings.

Are older retirees more prone to frugality given their experience of multiple recessions compared to younger generations? While the Australian economy has suffered several slowdowns in recent decades, its last technical recession occurred in the early 1990s. Before that, the economy went through regular booms and busts. Many retirees today entered the workforce during the 1970s, a period when the Australian economy suffered four recessions in a decade. Have these experiences made some retirees more cautious now that they are no longer in the workforce?

Untapped equity in the family home

Is the desire to leave a bequest to adult children stronger than assumed? Does this include the family home, leaving significant housing equity untapped that could help fund retirement?

The family home has become a significant source of wealth for many older Australians as east coast residential property prices have soared in recent years. However, few retirees use this wealth to fund their retirement with reverse mortgages remaining deeply unpopular.

The majority of retirees want to ‘age in place’, viewing their home as another safety net if required to potentially pay for an aged-care bond or some other unexpected event, but plan to leave the home to their adult children.

Figure 2: Perceptions of the role of the family home in retirementa

Government policies, such as excluding the family home from the age pension assets test and state-imposed stamp duties on property transactions, have also encouraged retirees to hold on to their home. However, the 2017-2018 budget proposed allowing people over 65 to sell their primary residence and roll up to $300,000 per person into super.

Are retirees diverting savings to help their adult children enter the property market at the cost of their own retirement lifestyle?

Home ownership rates have plummeted in recent years as record low interest rates have spurred an investor-led housing boom. According to the Household, Income and Labour Dynamics in Australia (HILDA) survey, couples (aged between 20 and 29) with kids aged younger than 14, have seen a 13% fall in house ownership, and single people in this age bracket, also with kids younger than 14, have seen a 40% drop. Married couples, aged between 60 and 69, with no dependent kids, have seen a 1% increase, while single 50- to 59-year-olds, with kids, have seen a 7% increase.

Yet, there is some evidence that a rising proportion of parents are helping their adult children get a foot on the property ladder by guaranteeing home loans or providing a partial deposit.

What is the subjective experience of Australians in retirement?

Has the financial services industry overestimated the cost of living in retirement or will spending pick up as the super system matures and people have higher balances? This is a confronting issue for many people that tests our assumptions about work, lifestyle, and the nature of retirement.

The HILDA survey has previously suggested that increases in age strongly correlate with reduced odds of financial stress, beyond what can be accounted for by differences in education, marital status, labour market experiences, wealth, or household income.

Financial stress classifies any individual who struggles to pay their utility bills, mortgage, or rent on time, and has foregone necessities, pawned or sold something, or has sought financial assistance from friends, family, or a welfare organisation. Financial stress is more common among young people (20- to 29-year-olds), with 56% experiencing financial stress in 2015, down from 61% from 2006. For individuals aged between 40 and 49, half experienced financial stress, compared to only 39% in 2006. Finally, for those aged over 70, only 13% experienced financial stress, compared to 10% in 2006.

A separate analysis of HILDA data, examining individuals’ self-reported changes in standard of living, financial security, and overall happiness over the transition to retirement, found subjective well-being either improved or remained constant for the majority of people.

However, the research also found that people who were forced to retire early after losing their job or due to poor health, and then suffered lower-than-expected retirement incomes, reported significant declines in their well-being.

It is difficult to draw a direct line between this research and the knowledge that half of all retirees are spending less than the age pension.

More information is needed, which superannuation funds can obtain directly from their members. In this way, super funds’ general advice can be better aligned with the actual experience and needs of members. It is also part of an important, and broader, conversation about the adequacy of older Australians’ living standards after a lifetime in the workforce.


Jeff Gebler is a senior consultant at actuarial firm, Milliman. Read more about the Milliman Retirement ESP here.

April 12, 2018

How was the ESP data collected? If spending figures were self reported then they are likely to understate actual spending. As a financial adviser I know that if you ask someone how much they spend, and then compare this with their income and ask "did you save the surplus income?" they normally say "oh, no, I must have spent it on something...". Self reported spending is very unreliable. People notoriously underestimate all the 'one-off' items of expenditure.

Val Power
April 09, 2018

To-days retirees began their independent lives when there were no credit cards. The only loan they aspired to was to buy a home. Many couples raised large families and luxury items were not necessary. Good food, good health and a good education were necessities. The aim was to raise loving caring children who became good citizens. That being accomplished, life's work was done and spending on unnecessary things is never considered.

Gay Cottrell
April 08, 2018

Not all retired people have a family home & most of us entered the work force in the 60's when there was no superannuation at all. If you wanted to try to save it came out of your salary & If you could afford to. The opportunities then we're far less than now. Don't forget a lot of us moved from family homes on the country try to move to the city for work as at that time it was hard to get s job in the country especially if you wanted to have a career. This meant rent had to be paid as well as food etc. You had to do it on your own from your wages at the time. In most cases there was not a living away from home allowance. People joining the workforce today have a greater opportunity to plan for retirement. My comment is to highlight that some situations seem not to be considered.

March 25, 2018

Low spending in retirement based on minimum drawdowns from superannuation accounts may mislead. Many retirees have funding sources outside the superannuation system and should use these before touching their super, due in part to favourable taxation treatment of assets in super and the inability to add more to super. In my case, I draw the minimum 4% ($60k) from super, then top this up with a $20k CSS pension, $40k nett rent from investment property, $30k US dividends plus $50k cap gains from US stocks. When that is not enough, last ditch savings accounts can be tapped. My wife still works half-time, so we "get by". My $50k super pension pays for only a minority of my retirement costs and I won't deplete the super balance until taxable options are exhausted - or Labor makes super unattractive.

Martin Mulcare
March 24, 2018

The behavourial aspects highlighted by Jeff are fascinating and, I suspect, there are a wide range of behaviours in practice. The preservation of the family home is of particular interest and I wonder how much of a role their adult children play in influencing the retirees' decisions?

March 24, 2018

retirees poverty line should not be the same as younger people. There is discounted travel and many other reductions in living expenses available to retirees. They don't spend much because they don't need to! They are not living below the poverty line because their needs are less.

March 23, 2018

Retirees who have a small amount of super (< $600k) will not be spending much because they feel financially insecure.
Governments seem to be fickle when it comes to super. It won't be beyond the bounds of probability for future governments (esp. Labor) to start skimming super accounts by imposing taxes, in order to help prop up the budget.
Or, they will require retirees to spend all their super before they are offered the old age pension. I've heard for every $100k of super you have, will delay the start of your pension by a year.

March 22, 2018

Graham in your newsletter comments here, I love the soccer reference: "Of course, 60 is the new 40. When I play football on Saturday, I take Voltaren with breakfast, top up with Panadol Osteo mid-morning, secure my ankles and shoulders with strapping tape, squeeze into Skins wear and use an elastic bandage on my right hamstring. My left shoulder and right knee have titanium pins. At the game, I massage with Dencorub before a stretching regime, then I try not to break anything for a couple of hours. Sunday I hobble around, Monday I go to the physio. Repeat."

I used to say that I won’t play any sport/ exercise where getting to the place for doing it takes longer than the actual event itself.

I now go off a new comparison – I don’t do it if I need to take more time in physical preparation and maintenance (stretching, pills etc) than the event itself!


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