Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 273

The reality of three phases of retirement

Planning for how you would like your retirement years to play out can be an exciting proposition. Amid those holidays and time spent with family, however, it is important to also consider the 'frailty years'. They are the later years of retirement where you might experience physical and cognitive decline. A plan is needed if you want to maintain independence for as long as possible.

The reality is that we are all likely to experience some cognitive decline or lose some of our physical ability as we age. This is a natural process but does not mean we will all develop dementia or lose the ability to live independently.

But at some point, we may need to ask for help with our normal activities of daily living. This might be help we access in our own home, or we might need to move into residential care for a higher level of support.

Funding the increasing costs of care allows greater independence and control, which is key to a happier retirement. Take control while you still have capacity to make these choices yourself.

Rethinking retirement planning

We need to rethink our approach to retirement planning to consider the increasing cost and complexity of aged care.

Recognising and accounting for retirement income needs can reduce the risk of retiring with insufficient savings. This should include the means to deal with the increased cost of care in the later stages of retirement which can influence when we are 'retirement ready'.

Historically, the approach to retirement planning has been to decide what income you need and then calculate how much you need to save to generate this income. Most people assume a flat (or declining) level of income which grows with inflation. However, if you consider the cost of care, the pattern is more likely to follow an upwards curve as shown in the graph below.

 Retirement phases: care-free, quiet, and frailty years

Retirement phases: care-free, quiet, and frailty years

The three phases of retirement

There are three phases of retirement linked to a retiree’s health, including years:

  • without disability
  • with some disability
  • with severe disability.

Retirement planning and projections need to consider the income requirements for each of these phases, including the frailty years when expenditure patterns change.

An average 65-year-old retiree will have a health pattern as shown in the diagram below.

Spending patterns in retirement are likely to vary over the three phases.

Phase 1 is the initial period of retirement with 'care-free' years to focus on travel, spending time with family and friends and basically loving life! Health and wellbeing during this time are good, and the income needs of this phase of retirement are generally well accounted for in the planning process.

Phase 2 includes the 'quiet' years when health starts to decline. As we experience some disability, the level of activity and therefore spending declines.

Phase 3 is when we experience severe disability, and can be described as the 'frailty' years. This can account for 17%-25% of retirement years where help may be needed with daily living activities, and more is likely to be spent on dealing with aged care needs.

Preference for ageing in place

Older Australians strongly prefer to age in place (in their homes) rather than move into residential care. The costs of aged care have been accelerating at a rate higher than inflation. The opportunities for home care (in terms of home adaptations) are also increasing, adding pressure to retiree household budgets.

We might need increasing levels of support over the last 10-12 years of our life, with many people experiencing high levels of care dependency in the last 4-5 years.  This may require income to cover:

  • home care costs
  • home adaptions to make the home suitable, such as widening doorways for wheelchairs and ramps.

Aged care costs can be difficult to predict and can vary from $100 - $5,000 a week ($5,200 p.a. - $260,000 p.a.) depending on care needs and family circumstances. Access to government subsidies helps to drastically reduce the cost payable by the user, but having adequate savings expands the options available and the ability to control the level and type of care received.


Did you know: ASFA Retirement Standard

Modest retirement for a single 85-year-old only allows $31.04 per week for care and cleaning. This is less than half the basic daily fee for a home package and that’s before extras!


Fragility is the third pillar of retirement risks

When planning for retirement and calculating the required level of savings, we usually consider two key retirement risks - longevity and sequencing risk. Longevity risk means savings may run out earlier than anticipated.

There is a third pillar of retirement risk – frailty risk - which if ignored, could also cause savings to run out earlier than anticipated, exacerbating the longevity risk. We need to manage the greater spending in the third phase, and in particular, care costs could be significant. Planning for frailty years should consider independence and control and the ability to stay in your home as long as possible, including:

  • How you expect to fund aged care costs – recognising that legislation has been shifting towards a greater user-pays basis
  • The role of your home in meeting aged care costs – including your willingness to access the equity in your home as against a preference to maintain the equity in your home as an inheritance for your family
  • Ability to rely on family and friends to provide care and financial support
  • If you choose to move to residential care, what options you have for funding the accommodation deposit and ongoing costs

It is important that you discuss these issues with your financial planner to ensure that you plan for a secure and comfortable retirement throughout all phases of your retirement – including the frailty years.

 

Assyat David is a Director of Aged Care Steps.

  •   26 September 2018
  • 3
  •      
  •   

RELATED ARTICLES

Living the lifestyle you want in retirement

Retirement catches most people unplanned

Can you manage sequencing risk in retirement?

banner

Most viewed in recent weeks

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Welcome to Firstlinks Edition 667 with weekend update

The downfall of the giant and three lessons for investors.

  • 18 June 2026

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Latest Updates

Planning

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning. 

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Investment strategies

CGT reform and fund turnover: who really feels the impact?

The implications of CGT reform are far and wide. As the 50% discount gives way to inflation indexation, turnover and return profiles may become critical drivers of after-tax performance. Some strategies face a far greater hit. 

Superannuation

Super was built for a very different Australia

Our retirement system was built around assumptions that no longer hold. Lower homeownership, longer lifespans and changing expectations are exposing cracks that policymakers and super funds need to address. 

Retirement

Retirement in reality - 4 months in

Many people spend years planning financially for retirement but little time preparing for what comes next. Four months in, here are the surprising lessons i've learnt on finding purpose, social connection and healthy habits. 

Investment strategies

After the Budget, Australia needs its own definition of quality

As tax reforms reshape investment incentives, investors should rethink what quality investing means in the uniquely concentrated Australian market, where traditional frameworks may not translate as effectively.

Datacenters are the new shale oil

Why are tech giants pouring billions into datacentres when the economics look questionable? The most dangerous words in investing may be: "everyone else is doing it". Today's AI boom has striking parallels with the shale bust.

Sponsors

Alliances

© 2026 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.