Stereotyping Retirement (Income)

One of the dangers in life is the tendency to stereotype people, money, and the more esoteric things that make up our lives.

We see a dishevelled person in our neighbourhood pushing a shopping trolley with what appears to be their worldly possessions, and we assume they are homeless.

This is a national pastime – putting people and other aspects of life into neat little boxes.

In past articles we have discussed retirement income and how much is enough. And in those missives, we often refer to the Retirement Standard published by the Association of Superannuation Funds of Australia (ASFA) each quarter.

The Retirement Standard has just been updated for the quarter ended December 2020 and it reveals an increase in annual retirement living costs[1]:

When we look at these numbers there are a couple of important things to keep in perspective:

1. The figures are backward looking – that is, they are based on living costs that were current as of December 2020.
2. The figures are the average living costs for all capital cities combined. Individual state capitals and regional centres may be more, or less expensive, on average
3. They are an average. It does not mean that all retirees fit neatly into one of these boxes when it comes to individual living costs.

In other words, while the published figures provide guidance of how much it will cost a single or a couple to enjoy a modest or a comfortable lifestyle in retirement, we cannot stereotype retired folk and assume these average figures apply to everyone.

The ASFA website includes an extensive breakdown of the budgets for each lifestyle and relationship status. The budget, particularly for the comfortable lifestyle, includes amounts to be set aside for future expenses such as replacing white goods, home maintenance and the like – so it is not all money to be spent on a regular weekly basis.

Retirement income planning in practice

I recently became aware of a situation. A lady and her husband were about to embark on retirement. They had diligently worked out how much they thought they would spend on a weekly basis, particularly during the early stages of their retirement. They plan to remain in their current home and will undertake extended camping trips in the early years. Any plans for overseas travel have naturally been shelved for the foreseeable future – for obvious reasons.

This lady said that after completing a thorough budgeting exercise, she believes they will need around $65,000 a year to live on, at least in the first year or two of their retirement. I was interested to see that this amount came in just over the cost of a comfortable lifestyle.

However, things could be very different for these folk.

For example, if they lived in a high-rise unit complex with high maintenance costs and enjoyed a very lavish lifestyle filled with travel to exotic international destinations and fine dining, their budgeted retirement living costs could be far greater than $65,000. Perhaps $100,000, $150,000, or even more would be a realistic figure.

The important message is that even though there is a lot of information about the average costs of living in retirement, these are only averages. Retirees cannot and should not be stereotyped when it comes to their preferred retirement lifestyle and how much superannuation they will need to fund their preferred lifestyle. Afterall, no two people are the same.

Averages are a useful starting point. They are not the end point.

For people planning for retirement, it is important to spend some time thinking about your preferred lifestyle and then develop a realistic budget for what that lifestyle is going to cost. Don’t forget to add in another 10 or 20% for the unexpected.

In addition, a retirement budget is not a set and forget strategy. Life is constantly changing and, particularly as we age, our expense patterns will change. We need to accommodate those changes. In the early years of retirement, the budget needs to be reviewed at least annually.

Here are some tips for preparing financially for retirement:

1. Spend time thinking about what you would like your retirement lifestyle to look like.
2. Prepare a thorough budget, remembering to include money for things that might only occur occasionally - like replacing a kitchen, bathroom, white goods, motor vehicle etc.
3. Include an allowance for emergencies and other contingencies
4. Understand where the money will come from. If self-funded retirement, do you have enough capital to generate the desired level of income?
5. If intending to rely wholly or partly on Government income support like the age pension, understand the eligibility requirements, including age limits, and access to other benefits including the Pensioner Concession Card or Commonwealth Seniors Health Card.
6. If planning to use the equity in your own home as a source of retirement income, carefully consider all the implications of your preferred scheme, be it an equity release arrangement, reverse mortgage, or the government’s Pensions Loans Scheme. Understand how these different arrangements might impact on your plans to leave your home to family members.
7. Once you have prepared your retirement budget, give it a dry run. Practice living on your retirement budget for a year before actually retiring. This will at least give you an opportunity to stress test the budget to ensure you can live your intended retirement dream in comfort.
8. Don’t stereotype retirement living expenses. What is average or is right for your friends might be totally inappropriate for you.
9. And finally, retirement is a big step in anyone’s life. Seek expert guidance from a financial planner experienced in retirement planning. Their advice can be the difference between a comfortable, and a very bleak retirement full of regrets, resentment, and unfulfilled dreams.

[1] Source: https://www.superannuation.asn.au/resources/retirement-standard