Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 95

Retirement spending: set the bar lower

The longevity of its citizens is one indicator of the prosperity of a society. Australia is well up there – the most recent published Australian life tables (released in December 2014) show that a 65 year old man today is expected (on average) to live to 84.2 years and a female to 87.0 years. This means we will have more retirees living for longer. But in terms of their financial health, the key question is: Will their savings run out before they do?

Life expectancy continues to increase

There’s no doubt that Australian retirees will need to combine lower spending strategies and the right investment options to improve the chance that their income will last for an increasingly likely period of 25 years or more in retirement. Mortality rates for the over 65s have been improving steadily since the early 1970s and retirees are now expected to live 3 to 3.5 years longer. Using these improved life tables, there is more than a 70% chance that at least one of a retired couple will be alive at the age of 90.

Using Towers Watson’s Retirement Planner, we modelled a number of scenarios for a couple, both aged 65, retiring today with superannuation assets of $500,000. A couple was chosen based on 2007 Census data that showed more than 70% of Australians enter retirement as part of a couple. When considering how you invest for financial success in retirement, there are several factors that come into play, including how much superannuation a saver has available at the start of retirement, their spending plans, the amount of any other savings they have, as well as their risk tolerance and preferences. An individual’s spending strategy however, is one of the biggest factors that will determine whether or not they will achieve financial success.

The Retirement Planner showed the impact of different investment strategies for the couple who want to make their savings last 25 years to age 90, varying their exposure to growth assets from 0% (cash) to 30% (conservative) to 50% (moderate) to 70% (balanced) to 85% (growth) to 100% (high growth).

Investing in a balanced portfolio, the couple is expected to be able to spend $57,705 a year (including Age Pension amounts available after applying means tests) up to age 90. After that, they would be expected to rely solely on the Age Pension. It is important to recognise that this is only the expected outcome. There is only a 48% chance that their superannuation will last until age 90. But if we looked at this from the spending perspective, we can see a different impact.

If the couple adopts a lower spending strategy (say, $50,000 or $52,000 a year), there is a much higher likelihood of success (more than 80%) for both the conservative and balanced options. Alternatively, if the couple spends at higher levels (such as $54,000 to $58,000 a year) then the investment option chosen has a more significant impact on the outcome. For example, under a balanced investment option, spending $54,000 a year has a 67% likelihood of success, compared to 56% under a conservative investment option.

Impact of spending strategy and investment option on likelihood of super lasting to age 90

Source: Towers Watson analysis 2014

When combined with a lower spending strategy, there is little difference in the likelihood of savings lasting to age 90 for a conservative versus a balanced investment portfolio. But the residual balance left over at age 90 is likely to be much higher for a balanced investment portfolio. For the sample couple, staying invested in growth assets produces a better outcome than de-risking, either gradually via a lifecycle or target date fund or more suddenly.

$50,000 pa spending strategy – residual balance and likelihood of super lasting to age 90

Source: Towers Watson analysis 2014

Retirees likely to have variable spending patterns

A number of academic research papers suggest that a retiree’s spending is likely to start reducing by around age 80. This is supported by recent ASFA research which produced a revised Retirement Standard for a 90 year old (the original ASFA Retirement Standard is based on a 70 year old), which shows that the ‘comfortable’ level of expenditures for a 90 year old is about 10% lower than for retirees aged 65-80.

This provides a good opportunity for a retiree in their 70s to purchase some form of guaranteed annuity or other longevity risk pooling vehicle. An adaptive spending strategy, where people adjust their spending based on recent performance, is also likely to further improve the likelihood of financial success in retirement.

When designing default retirement income solutions, superannuation funds first need to understand the demographics and expectations of the members they are targeting. The funds also need to help their members to understand more about their own expected retirement outcomes and the risks they face, by providing tools such as written retirement income estimates and online calculators. Only then will funds be able to guide their members more effectively into retirement income solutions that better suit their needs.

 

Andrew Boal is Managing Director for Towers Watson in Australia. This article is general information and readers should seek their own professional advice. A full copy of the paper: The path to retirement success: How important are your investment and spending strategies? can be found here.

 

  •   5 February 2015
  • 3
  •      
  •   
3 Comments
Jerome Lander
February 05, 2015

Very succinct article with good insight. Generic derisking in retirement is rarely a good idea. Good risk management needs to consider the possibility that lifespan (and quality of life) is extended beyond anyone's current expectations due to medical science and technology advancements. 20-30 years is a long time and a step change is a significant possibility over this period.

Given cash and bond yields are set to reach very low levels in Australia - and the current global investment backdrop of financial repression - derisking becomes a potentially risky strategy for retirees to adopt.

Just as saving before retirement is incredibly important, you highlight the importance of sensible spending in retirement.

Geoff Howse
February 09, 2015

Succinct, but not very useful without one piece of information which seems to be missing: Is the annual spending of $50-52k in 2015 purchasing power or in the face value of the currency in future years? Even with low inflation of say 2-3%, after 20-25 years this has a very significant effect. If for some unexpected reason we get a few years of say 6% inflation, then $50k would be starting to sound very dire.

Andrew Boal
February 09, 2015

Thanks Geoff, we have allowed for indexation of income levels at AWOTE to keep pace not only with inflation but also community livings standards. Of course, later in life, inflation indexation is probably enough. Combined with a lower spending level in later life, this provides a great opportunity to purchase some form of longevity insurance (which is also a form of dementia proofing your portfolio, as 25-30% of 85-90 years olds have dementia).

 

Leave a Comment:

RELATED ARTICLES

How to give retirees the confidence to spend

Summer Series, Guest Editor, Jeremy Cooper

Inflation cruels a comfortable retirement

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Latest Updates

Interviews

AFIC on the speculative ASX boom, opportunities, and LIC discounts

In an interview with Firstlinks, CEO Mark Freeman discusses how speculative ASX stocks have crushed blue chips this year, companies he likes now, and why he’s confident AFIC’s NTA discount will close.

Investment strategies

Solving the Australian equities conundrum

The ASX's performance this year has again highlighted a persistent riddle facing investors – how to approach an index reliant on a few sectors and handful of stocks. Here are some ideas on how to build a durable portfolio.

Retirement

Regulators warn super funds to lift retirement focus

Despite three years under the retirement income covenant, regulators warn a growing gap between leading and lagging super funds, driven by poor member insights and patchy outcomes measurement.

Shares

Australian equities: a tale of two markets

The ASX seems a market split in two: between the haves and have nots; or those with growth and momentum and those without. In this environment, opportunity favours those willing to look beyond the obvious.

Investment strategies

Dotcom on steroids Part II

OpenAI’s business model isn't sustainable in the long run. If markets catch on, the company could face higher borrowing costs, or worse, and that would have major spillover effects.

Investment strategies

AI’s debt binge draws European telco parallels

‘Hyperscalers’ including Google, Meta and Microsoft are fuelling an unprecedented surge in equity and debt issuance to bankroll massive AI-driven capital expenditure. History shows this isn't without risk.

Investment strategies

Leveraged single stock ETFs don't work as advertised

Leveraged ETFs seek to deliver some multiple of an underlying index or reference asset’s return over a day. Yet, they aren’t even delivering the target return on an average day as they’re meant to do.

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.