Retiree spending patterns differ from most expectations

Wade, an interesting article (and comments).
I have not quite reached the age of 80 but I am finding that my spending is reducing each year. I travel overseas usually once a year to visit distant family and friends but not now for “tourism” reasons having visited most places that I always wanted to see. I drive less, to the extent that my 12 year old car is still in good repair and lowish mileage and doesn’t need replacing. My health remains good. Almost half my spending goes on helping my 2 sons. We own our own house; I have more clothes in my wardrobe than I can wearout in the rest of my life; and we only infrequently eat out. Our absorbing interests and hobbies are quite inexpensive.
However, I have friends and acquaintances whose spending habits are quite different, especially in terms of travel, wining & dining; replacing cars regularly and state of health, and the spread of average spend between us is very wide. So declining spending with increasing age is a matter of lifestyle (discretionary) and circumstances (non-discretionary) for which a chart showing data-spread rather than data-average would be interesting to see.

Thanks everyone for your comments and questions.

As some have pointed out, there are some simplifying assumptions within this particular article. In part this was done deliberately given the intent was to highlight the impact simply changing the trajectory of retirement spending (declining, flat or rising) can have on asset values and as a result the conversations advisers may have with their clients. The analytical tools we have developed take into consideration the wide range of factors that will impact overall balances, including minimum draw down rules, means tested age pension payments (the subject of another recent piece of research we have conducted) as well as other relevant items.

There is a wide range of research we have conducted particularly on retirement spending over a number of years which goes into much more detail than was possible to incorporate in this article (apologies both Johns), however, what is clear from this work is that many of the anecdotal assumptions or views we had prior to this work have been challenged and tested. Ultimately this has resulted in additional questions and analysis, hopefully resulting in a deeper understanding of retiree behaviour.

I would be happy to discuss this work further or point you in the direction of some of the supplemental research if interested.

It is so hard to predict what our circumstances will be as we age, but I have noted my mother and her partners spending has dropped off markedly as they move to mid to late eighties in years, but they weren't big spenders anyway.

Scant mention of Govt mandated drawdown rates for pension accounts - if you are 70, your account balance must be drawn down by minimum 5% - up to 11% if you make 90. Each year your account goes down by the mandated minimum and up by the earnings. What you "spend" is irrelevant to the balance, unless you are spending and withdrawing, more than the minimum. The above graphs take no account of that reality.

For individuals it is more complex - if the mandated minimum exceeds their cost of living, it still comes "out" of the Pension Fund - it can be invested elsewhere at marginal tax rates, spent, given away, whatever, but the Pension balance is still reduced. The clear Govt intent is that you are forced to reduce your Pension Account as you age - when you finally cark it, we have a death tax "in drag", on the Taxed Component of what's left!

Simplistic analysis does not help, personal planning that brings all the factors together, does.

Absolutely agree with Rob's comments.
Given the massive decrease in my portfolio valuation (and debatable as to whether this will fall further or go up), the impact of reduced or suspended dividends, and the fact that I believe that the Government will stop franking credits in the not so distant future (as well as include the family home in the assets test for everything ... including SAPTO ) it is unlikely that income will be greater than the mandated minimum draw downs .... even at the current 50% reduced rate.
What a terrible time to have retired!

Yes. Relevance of drawdown depends on what you do with it. If you simply switch funds from super to personal account, the difference is only the tax savings (which could be little if in low tax bracket). If you spend it, of course, the effect is larger. The point is that drawdown itself is not determinative factor.

Wade this is very interesting and very important. As you say, it has significant financial planning implications, for advisers and their clients. (And the advice firms, which could consider building different expenditure assumptions into their standard software!).

I have a couple of questions though.

1 It's not clear from the article whether the various references to spending changes are real or nominal (eg the assertion that spending decreases by 6% to 8% as you move to the next older quinquennial age band. Does that mean that expenditure declines by 6% to 8% in nominal dollars or real (inflation adjusted) dollars?

2 I was wondering why the rate of health expenditure would decline "rapidly" after age 80. Anecdotally there are a lot of health costs in the last year or two of life, which would suggest high health expenditure at the older ages. Is that because a lot of those costs are not borne by the elderly individual, but by the public medical and hospital systems?

3 The methodology of the study is not clear from the article. Is it possible that some of the findings are influenced by the wealth of the relevant cohort of retirees? For example, that older retirees are found to spend less - but is that because older retirees had fewer years of Superannuation Guarantee, so they HAVE LESS to spend?

4 Is a full version of the Milliman research paper available?

Again thanks for a very interesting article.

John,
I totally agree with your points.
There is a further possible wrinkle in that, if the older retirees have less to spend, they may choose to not pay for medical care or for medical insurance. This would lead to them relying more on the public system, providing a feedback loop into your second point. The rapid decline of health expenditure after age 80 looks wrong.