RETIREMENT SAVING: The older we get the more we tend to save.
RETIREMENT SAVING: The older we get the more we tend to save. Wavebreakmedia

The numbers are in: We are saving more as we age

MOVING from employment into retirement is one of the most stressful financial stages in life, but it may be surprising to learn that the older we get the more we tend to save.

That's one of the findings from actuarial services provider Milliman in a new report, which suggests that retirees' age is just as strong an indicator of behaviour as income levels.

It casts doubt on common benchmarks, such as using a percentage of one's final salary as a retirement savings target, which makes little allowance for lifestyle changes.

Of course, some of us will spend more in retirement and others less. Some will run out of superannuation money and need to rely on the Age Pension.

Yet, the Milliman Retirement Expectations and Spending Profiles (ESP) report shows that the median retired couple's expenditure falls by more than one-third (36.7 per cent) as they move from early retirement (age 65 to 69) and into older age (85 years and beyond).

Interestingly, this new analysis includes the latest census income data and shows that poor, middle-income and high-income retirees all show similar declines in expenditure throughout retirement.

The research tracks personal income (using census data) against expenditure (using the Milliman Retirement ESP) for low-income retirees (annual income below $33,800). While expenditure briefly peaks above income just before retirement in their early 60s, it quickly tapers off into older age.

These low-income earners actually earn their highest lifetime incomes through retirement, earning more as they age. This is largely due to the support of the government Age Pension.

Middle-income retirees (annual income between $33,800 and $91,000) also show similar declining expenditure (although their expenditure never exceeds income). Their peak spending - as a proportion of their income - is reached in their late 60s. At this point, average incomes are sitting at around $54,000, and spending is at a little over $30,000.

Similarly, high-income earners (annual income above $91,000) are also saving money into retirement. Their spending drops from a peak figure of around $80,000 a year at about age 50, to around $65,000 in the late 60s, to around $38,000 once they hit age 85.

The Milliman research shows that while wealthier retirees spend more in absolute terms, all three groups are saving money in retirement to greater and lesser degrees.

The Milliman Retirement ESP provides the most accurate possible picture of retiree behaviour by tracking changes in the real-world expenditure of more than 300,000 older Australians.

It shows that the average proportion of income spent on housing, food, energy, leisure, goods and services, travel and insurance either declines slightly, or remains the same, regardless of income levels, through retirement. Only expenditure on healthcare increases.

Travel is the biggest loser as we age and lose mobility, falling from about 8 per cent of spending to below 4 per cent.

Yet, while overall spending declines, there are still significant variations between the lowest and highest earners in terms of how money is spent.

There are also important expenditure trends underway, with home ownership levels declining in Sydney and Melbourne while energy prices are escalating quickly.

Milliman consultant Jeff Gebler says that although energy represents a small proportion of overall household expenditure, the amount spent is significantly correlated to income levels: higher income households have more expensive (and energy-consuming) lifestyles.

Energy expenditure increases until about age 65 and then stabilises before rising from age 80 (this may be because elderly Australians spend more time at home and want to feel more comfortable rather than moving into aged care accommodation).

All this data is interesting, but it has some practical implications as well. For one thing, superannuation funds and other financial product groups should be using it to design products to better meet the long-term income needs of retirees.

Tony Kaye is the Editor of Eureka Report, which is owned by listed financial services group InvestSMART.

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