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Actuaries suggest retirement savings calculations should account for decreased spending as people age.
Spending typically drops by 2.7% to 3.3% annually between ages 65 and 85-plus.
This could mean needing significantly less savings, potentially $300,000 instead of $1 million.
There is good news for anyone worried about potentially needing to save millions of dollars for retirement – actuaries say these calculations might not be adequately factoring in how people’s spending drops through retirement.
There has been no shortage of reportssuggesting people need bank balances into the seven figures to be able to retire.
But Alison O’Connell, a council member of the NZ Society of Actuaries, said the industry and Government should review the assumptions that were implicit in that commentary, and tools such as calculators, to ensure they reflected the way spending typically changed as people got older.
“People do spend less in real terms as they age. It might be the same in dollar amount but less when inflation is taken into account.
The report showed that spending dropped between 65 and 85-plus by between 2.7% and 3.3% a year. Photo / 123RF
“It makes sense – we see retirees being active in the early stages of retirement and less as they get older. People spending less on discretionary items.
“It sort of fits with what you see all around you and the data shows it – it’s remarkable it’s not taken into account in any of the forecasts of how much you should save.
“What we’re saying is there is a lot of evidence for this, all of the people putting together calculators should be thinking about how they’re going to take that into account.”
It would make a difference to how much people needed to save, she said. The actuaries produced a report that showed that if spending reduced by 2% a year from 65, the savings balance needed at 65 could be 40% smaller.
The report showed that spending dropped between 65 and 85-plus by between 2.7% and 3.3% a year. The rate of decrease in spending for people aged 70 to 74 was lower for couples, at 2.9% a year but higher for single people at 3.8%.
“When we see big numbers we should question the assumption underlying that. Is it assuming you keep spending at a rate which is not what you want to do or are likely to do?”
She said there was a risk that there was a feeling of “one-size-fits-all” for retirement planning.
“It’s worth bearing in mind when people put out very big numbers that they have a target market.”
It could be that people needed a sum more like $300,000 than $2 million, she said.
“The real figure may still be quite scary for people who don’t have too much savings.”
People should consider the impact of their own spending reducing in real terms, she said. That might mean front-loading the drawdown of their investments, with a plan to rely more on the pension later.
Food, cost of working factors
Economist Shamubeel Eaqub said people would even eat less as they got older. A lot of the cost of living was associated with the cost of working, and if people did not have to go out to work, their costs could drop.
“There a lot of industry benefit in talking about massive numbers … in reality the numbers are quite manageable.
"I think a little bit of myth-busting as the actuaries have done is really helpful,” says Shamubeel Eaqub. Photo / Andrew Warner
“We should not discourage lower-income people from saving for retirement. It could be the bit that makes all the difference. There’s a risk they give up before they start when the target is so unachievable … I think a little bit of myth-busting as the actuaries have done is really helpful.”
But he said people should also be conscious that some of the drop in spending was forced upon people.
“That’s the bit we want to avoid. You shouldn’t have to do without. Part of the picture is some households not buying things they would like to. The whole purpose of retirement saving is so you have the option.”
Basic or bells and whistles?
Founder of KiwiSaver provider Kernel Dean Anderson said working out how much was needed for retirement was like planning a dream home.
“Do you want a cosy bach by the beach or a sprawling villa with all the bells and whistles? It all depends on your style, the features you can’t live without, and what makes you feel at home. Everyone’s needs will be different, and the key is designing a plan that fits your life.”
Do you want a cosy bach by the beach or a sprawling villa? Founder of KiwiSaver provider Kernel Dean Anderson said working out how much was needed for retirement was like planning a dream home.
He said some people spent more in the first few years of retirement as they ticked off things they wanted to do, such as travel.
“Then there is the go-slow stage, where spending declines, but it is also where the risks start to rise.”
The unexpected medical bills, paying for living support, and let’s not forget longevity risk – that you plan for “average”, but a large proportion of Kiwis today will live well into their 80s and 90s.
“For day to day, NZ Super will cover most of the essentials, it then depends on what assets you have, what your desires are, and how much risk you have. Equally, there are a lot of people who enter retirement who have worked hard and often may not be spending enough.
“Independent advisers are often helping people enter retirement realise that they are okay, that they have enough to meet their needs, maybe they want to do more and they don’t need to fear running out. Remember, there is no obligation to leave a big nest egg.”
The alcohol factor
Eaqub’s data showed that people in the earlier years of retirement were spending more on alcohol than other groups.
“People generally are drinking a lot less but from an age perspective we see a bit of a bump of those people who are in early retirement buying it more regularly over time. Everyone is spending less on booze but recent retirees not so much.”
More than 50% of households where the oldest resident was 65 to 69 were buying alcohol beverages, compared to just over 40% of those aged 35 to 49.5 to 49.
