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.

 

3 Comments
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).

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.

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.

 

Leave a Comment:

RELATED ARTICLES

How to give retirees the confidence to spend

Summer Series, Guest Editor, Jeremy Cooper

Are lifetime income streams the answer or just the easy way out?

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

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.