Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 273

The reality of three phases of retirement

Planning for how you would like your retirement years to play out can be an exciting proposition. Amid those holidays and time spent with family, however, it is important to also consider the 'frailty years'. They are the later years of retirement where you might experience physical and cognitive decline. A plan is needed if you want to maintain independence for as long as possible.

The reality is that we are all likely to experience some cognitive decline or lose some of our physical ability as we age. This is a natural process but does not mean we will all develop dementia or lose the ability to live independently.

But at some point, we may need to ask for help with our normal activities of daily living. This might be help we access in our own home, or we might need to move into residential care for a higher level of support.

Funding the increasing costs of care allows greater independence and control, which is key to a happier retirement. Take control while you still have capacity to make these choices yourself.

Rethinking retirement planning

We need to rethink our approach to retirement planning to consider the increasing cost and complexity of aged care.

Recognising and accounting for retirement income needs can reduce the risk of retiring with insufficient savings. This should include the means to deal with the increased cost of care in the later stages of retirement which can influence when we are 'retirement ready'.

Historically, the approach to retirement planning has been to decide what income you need and then calculate how much you need to save to generate this income. Most people assume a flat (or declining) level of income which grows with inflation. However, if you consider the cost of care, the pattern is more likely to follow an upwards curve as shown in the graph below.

 Retirement phases: care-free, quiet, and frailty years

Retirement phases: care-free, quiet, and frailty years

The three phases of retirement

There are three phases of retirement linked to a retiree’s health, including years:

  • without disability
  • with some disability
  • with severe disability.

Retirement planning and projections need to consider the income requirements for each of these phases, including the frailty years when expenditure patterns change.

An average 65-year-old retiree will have a health pattern as shown in the diagram below.

Spending patterns in retirement are likely to vary over the three phases.

Phase 1 is the initial period of retirement with 'care-free' years to focus on travel, spending time with family and friends and basically loving life! Health and wellbeing during this time are good, and the income needs of this phase of retirement are generally well accounted for in the planning process.

Phase 2 includes the 'quiet' years when health starts to decline. As we experience some disability, the level of activity and therefore spending declines.

Phase 3 is when we experience severe disability, and can be described as the 'frailty' years. This can account for 17%-25% of retirement years where help may be needed with daily living activities, and more is likely to be spent on dealing with aged care needs.

Preference for ageing in place

Older Australians strongly prefer to age in place (in their homes) rather than move into residential care. The costs of aged care have been accelerating at a rate higher than inflation. The opportunities for home care (in terms of home adaptations) are also increasing, adding pressure to retiree household budgets.

We might need increasing levels of support over the last 10-12 years of our life, with many people experiencing high levels of care dependency in the last 4-5 years.  This may require income to cover:

  • home care costs
  • home adaptions to make the home suitable, such as widening doorways for wheelchairs and ramps.

Aged care costs can be difficult to predict and can vary from $100 - $5,000 a week ($5,200 p.a. - $260,000 p.a.) depending on care needs and family circumstances. Access to government subsidies helps to drastically reduce the cost payable by the user, but having adequate savings expands the options available and the ability to control the level and type of care received.


Did you know: ASFA Retirement Standard

Modest retirement for a single 85-year-old only allows $31.04 per week for care and cleaning. This is less than half the basic daily fee for a home package and that’s before extras!


Fragility is the third pillar of retirement risks

When planning for retirement and calculating the required level of savings, we usually consider two key retirement risks - longevity and sequencing risk. Longevity risk means savings may run out earlier than anticipated.

There is a third pillar of retirement risk – frailty risk - which if ignored, could also cause savings to run out earlier than anticipated, exacerbating the longevity risk. We need to manage the greater spending in the third phase, and in particular, care costs could be significant. Planning for frailty years should consider independence and control and the ability to stay in your home as long as possible, including:

  • How you expect to fund aged care costs – recognising that legislation has been shifting towards a greater user-pays basis
  • The role of your home in meeting aged care costs – including your willingness to access the equity in your home as against a preference to maintain the equity in your home as an inheritance for your family
  • Ability to rely on family and friends to provide care and financial support
  • If you choose to move to residential care, what options you have for funding the accommodation deposit and ongoing costs

It is important that you discuss these issues with your financial planner to ensure that you plan for a secure and comfortable retirement throughout all phases of your retirement – including the frailty years.

 

Assyat David is a Director of Aged Care Steps.

RELATED ARTICLES

Living the lifestyle you want in retirement

Retirement catches most people unplanned

Why a traditional retirement may be pushed back 25 years

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.