Effective planning for retirement means making yourself aware of all of the costs, including those that only retirees know about.
Many retirees are surprised by the costs they face once they enter the post-career phase of their lives. The typical objective, of course, is to live a quiet, relaxing and relatively low-cost life. Then reality comes along with its very clear and undeniably positive intentions of convincing you to enjoy yourself.
As we age with greater health the old image of retirement being all about bingo and raffles is as far from the real experience as you’ll get. Retirees have earned a certain type of lifestyle and they intend to live it. It includes travel, fashion, technology and fitness. In other words, retirees don’t expect a reduced quality of lifestyle just because they are no longer working for an income.
But when it comes to putting this into practice, where do the surprise costs come from?
Know the danger areas
The first, experts say, is the spending in the first year of retirement, which often includes a new car, major home renovations and/or a major travel event. While this is not always true (the CSIRO is currently conducting a major study into the real spending habits of retirees), it is common enough. The first year or two of retirement can be very expensive, indeed. But then spending drops dramatically.
Once people are into the flow of retirement, experts say, they need to prepare for costs that may differ slightly from those they have had to deal with in the past. Take petrol, for instance. Suddenly there is quite a lot of driving each day to visit grandchildren, attend social events, take holidays up the coast and even just to visit the shops to provide for a life that is now spent mostly at home. Many retirees express surprise at the amount they are now spending on fuel.
Of course, as retirees age they must also prepare for costs of health care, especially in a new political environment in which seniors’ cards, free doctor visits and other support mechanisms could potentially be pruned back or removed.
When a retiree’s adult children, or grandchildren, find themselves in difficult financial straits it is often the retirees they approach first for help. If you’re likely to help out by offering a loan then this could take a surprise chunk out of your invested funds, and therefore out of your investment return.
Investment funds can take a similar hit when unplanned work needs to be done to the house – the roof needs to be replaced, the building’s underpinning must be repaired to prevent subsidence, termite damage must be rectified etc.
Planning for the unforeseeable
So how do we plan for such unforeseen events? The perfect answer is to work out exactly what you will need to spend in retirement, but nobody has a crystal ball and we don’t live in a world of spreadsheets. How do we plan for what actually lies ahead?
A great deal of research has been conducted to provide an answer to this question and that answer, of course, always begins with; “It depends...”. A study conducted by Morningstar (USA) called Estimating the True Cost of Retirement reported, in 2013, that various households in retirement will spend from 54% to 87% of their pre-retirement after-tax income1 annually. The higher the pre-retirement income, the lower the percentage tends to be.
Importantly, this study also revealed that retirement costs for households with higher levels of consumption will likely decrease year to year throughout retirement, even as medical costs increase.
The ASFA Retirement Standard, which is produced by The Association of Superannuation Funds of Australia and updated quarterly for the Australian retirement environment, says those hoping for a comfortable retirement must budget for $42,254 annually for a single person or $57,817 annually for a couple.2 These numbers must be weighed against the type of retirement you are planning, the amount of travel you’d like to enjoy etc.
Perhaps a more individualised way to ensure that your quality of life is no different after retirement is to figure out what percentage of today’s annual, after-tax income you will require in retirement. Then, considering your intended retirement lifestyle, fine tune the figure upwards or downwards to come up with a target. Then speak with your adviser to figure out what this means in terms of your investment strategy.
1 ‘Estimating the true cost of retirement’, Morningstar Investment Management, November 2013.
2 ASFA Retirement Standard, 2014.