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

We need hard conversations about frailty planning

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

With the Coalition losing the 2022 election, its policy to allow young people to access super goes back on the shelf. But lowering the downsizer age to 55 was supported by Labor. Check the merits of both policies.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.