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Should retirees spend more and worry less?

Having enough income in retirement is a universal desire. As one adviser said to me, no matter how the question is framed, every single client essentially asks the same question: “Will I have enough?”

Research verifies this is a major concern. The lack of certainty around how much is ‘enough’ can cause anxiety and negatively impact on lifestyle. A study conducted by Allianz in 2010 titled Reclaiming the Future: Challenging Retirement Income Perceptions, involving more than 3,200 American participants ranging in age from 44 to 75, sought to determine people’s preparedness for retirement.

A fear worse than death

Allianz found that 61% of people feared running out of money in retirement, more than they feared death. Just think about how serious that is. Furthermore, 31% were not clear on what their expenses were likely to be in retirement and 36% were not sure if their income would last. So, whilst this is incredibly sobering it also represents a huge opportunity for the financial advice industry. People clearly need a plan, guidance and advice to navigate their way to a happy and fulfilling retirement.

Locally, Milliman's study found more than half of retired Australians restrict their spending to less than what the age pension would provide, and many, possibly up to a third, live in poverty. This is not what successful retirement looks like.

Milliman made some suggestions as to why retirees were restricting their spending to such an extent. They were:

  • self-insuring against longevity risk
  • wanting to leave a bequest
  • a conservative demographic that had lived through multiple recessions
  • a function of the immaturity of the retirement phase of the superannuation system, or
  • as an industry, we may have overestimated the cost of living and therefore income required in retirement.

All are plausible. Certainly retirement spending goes hand and hand with retirement income and Morningstar's Head of Retirement Research, David Blanchett has contributed to this part of the discussion via his piece “Exploring the Retirement Consumption Puzzle" published in 2014 in the Journal of Financial Planning.

What is the retirement consumption puzzle he refers to? His research found that in the US retirees are spending less than the models predicted. Traditional consumption models are potentially too simplistic, they assume straight line expenditure in retirement. As a result, pre-retirees may not need to accumulate as large a nest egg as initially thought. Whilst every individual journey is different, Blanchett's research found that in retirement spending declines over time, but not forever.

After a period of declining expenditure, spending begins to increase again as the retiree ages, largely due to increased medical expenses. Blanchett suggests following his ’retirement smile’ pattern (the visual of graphing how spending falls and then rises again - it looks a bit like a smile) would enable retirees to start their retirement with almost 15% less accumulated wealth. Current consumption assumptions may result in over-saving for retirement.

The retirement smile or at least the lack of straight-line spending in the real world, is something financial advisers have no doubt seen and can attest to already. It is important to get the saving/income/consumption equation right as it has large consequences to when you retire and your quality of life in retirement. People could be anchoring their spending expectations around a higher figure and this could be causing people to live more frugally than they need to.

Major decisions made sub-optimally

Living longer is great but it means we need to fund our retirement for longer. Defined benefits are almost a relic of the past as most of us are now responsible for choosing our own path to retirement. Inevitably, that will mean at some point in time we will need to navigate our way through market volatility.

Herein lies the challenge. Behavioural economists have uncovered that humans generally do not handle complex decision-making well. We behave in predictably irrational ways underpinned by our preference to avoid losses where possible. These ‘cognitive biases’ can cause us to make sub-optimal decisions that can have lasting ill effects.

Given these known biases, there is a real risk that people will not manage through episodes of market volatility well. History shows individuals tend to sell when markets are falling and buy when markets are rising. Buying high and selling low - and repeating the process - erodes wealth. It is classic loss-aversion behaviour and one of the reasons why people fail to capture market returns.

I am reminded of a comment by a presenter who worked for a company which sold annuities. He said: “People think they will live forever until they buy an annuity and then they think they might die tomorrow.” This is also a classic loss aversion behavioural response.

What can people do to ensure they have enough?

The good start is to seek advice. A great financial adviser can provide clarity around the saving-income-consumption equation and help answer important questions such as: Are my goals achievable? Am I on track? Will I have enough? How long will it take me to reach my goals? When can I retire?

As humans we make both rational and emotional decisions, and financial advisers can help coach clients through periods of volatility before they make a decision they may regret. The average investor that works with a financial adviser can be significantly better off than those who go it alone. In the US, Morningstar has attempted to quantify the value financial advice brings in a white paper Alpha, Beta and now...Gamma, the value could be as much as an additional 29% more income in retirement.

Each person’s journey is unique, and it was Benjamin Graham who said;

"Investing isn't about beating others at their game. It's about controlling yourself at your own game."

With the right guidance, retirees who are restricting their spending to less than the age pension might discover they have enough and perhaps they can live a retirement free of the burden of financial worry. Now that would be a successful retirement outcome.


Erica Hall is a Senior Manager Adviser Solutions at Morningstar Investment Management. This material has been prepared for educational purposes only, without reference to your objectives, financial situation or needs. You should seek your own advice and consider whether the advice is appropriate in light or your objectives, financial situation and needs.


September 06, 2019

Yes, I agree they should, BUT with the following condition. If you had enough money to look after yourself when you retired, no age pension for you if you spent it all on rubbish, except for genuine healthcare reasons.

Why ? Because it's TOO easy for people to "SKI" it away and then try and go on the pension. That's not what it's there for. Can you imagine the Carnegies, the Mellons, the Vanderbilts (the "old money" families) ever doing that ? No. They built wealth over generations, not acquire it and then spend it in one.

August 24, 2019

I suggest that individual retirees underspend because they want to insure adequate provision for very old age (90+).

About 17% of 70 year olds survive to 90. That is: 83% might not.

Currently there is no very old age insurance available other than reliance on the individual's investments and the Commonwealth Age Pension and Social Security.

Were retirees able to arrange group insurance, such as Tontines (, would they be more willing to send more?

August 26, 2019

I support Dudley in highlighting one aspect of retirement planning that policy makers continue to ignore in all their debate.

I am a self funded retiree. If I wish to be confident that my wife and I will remain self funded retirees until we both die, then I need to plan for the 90% likelihood that one of a couple will survive to their late 90’s (let us say age of 100).

Planning and spending for average longevity doesn’t help me. The mathematics of the problem drives me to plan for “worse case” longevity of 100 years knowing that 90% of us who take this approach won’t live that long and we will predecease our savings. So, we underspend and, coincidentally, we will leave a bequest. The bequest however, is a side effect rather than a retirement objective and it is only obvious in hindsight whether spending levels were too high or too low when actual lifespan is made known.

The Tontines strategy seems quite relevant.

Aaron Minney
August 30, 2019

Hi Dudley and Greg
While tontines are not available, Australian retirees are now able to access deferred lifetime annuities from Challenger that provide the longevity insurance you describe. These have been encouraged by the government's innovative income streams reforms in 2017 and as of 1 July 2019 the age pension means tests have been adjusted to accommodate these options.
Aaron Minney
Head of Retirement Income Research, Challenger

August 31, 2019

Aaron Minney, Head of Retirement Income Research, Challenger; "deferred lifetime annuities": A prime topic for a FirstLinks article. Explored here: .

August 22, 2019

Great article, highlighting one of the fun parts of financial advice - recommending clients enjoy themselves, by proving through financial modelling!
However, one slightly newer concern that has arisen over the last decade is the question of inheritance.

As an example, a retiree client (life long public teacher) started in the 70's as a trainee on $6,000p.a and finished a 40+ year career at $93,000. That is more than a 15 fold increase in pay over her working lifespan. She then watches her children enter the workforce 20 years ago and now have only just managed a 2.5 fold increase in pay over that time (white collar professionals).
With a long future ahead filled with low inflation and even lower wage growth prospects, coupled with sky-high asset prices (albeit at much lower interest rates), I would imagine there is more impetus now to ensure that there is something left behind to help right the ship.

Aaron Minney
August 22, 2019

Hi Erica
A comment on Blanchett's retirement smile.
If you look at the chart in his paper, this smile is in real spending rates. At the end of the smile, it has almost risen back to zero. That is, while medical expenses increase, other spending falls so that total spending is falling marginally in real terms. David describes it in his paper (p13) as: "Overall, however, the real change in annual spending through retirement is clearly negative."
Retirees hold many fears in retirement, and rising medical costs is one of them but advisers should be able give their clients peace of mind by understanding their likely budget needs through retirement.

Erica Hall
August 22, 2019

Hi Aaron, Thanks for reading the article and for your insightful comments. Appreciate your clarification around real spending rates in relation to David Blanchett's research on retirement spending. Thank you. Also to be clear the research he undertook was US specific and may not precisely correlate to Australian conditions. Nevertheless it highlights the importance of having a robust retirement consumption model as the unintended consequences of assumptions that are too high is people may severely restrict their spending for fear of running out money or they delay retirement. As you rightly pointed out this is where good financial advice can make such a difference in helping people plan and budget accordingly.

Anne Graham
August 22, 2019

Thanks for the insights Erica. As an adviser specialising in retirement planning, the biggest issue facing clients is "how much is enough?" and you are spot on in terms of spending patterns and adjusting the course. Unfortunately some clients simply do not have enough and struggle to make ends meet, but those who have been beneficiaries of our super system, and managed debt, seem to do quite well in retirement.


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