In what areas will my retirement cost of living be most affected?
The key question therefore becomes: How much would retirement of your choice cost? Should I create a budget and then monitor my spending?
Although that may become a problem at any point in later life, we will assume that you are in good health and don’t need to pay for significant operations or treatment costs.
We discuss a few key topics below that might have the biggest impacts on your retirement expenditures.
- Having a house
The means-tested pension, mandatory superannuation, and optional savings in and out of super are Australia’s three income streams, or pillars, that support the country’s retirement income scheme.
One may also argue that owning a house provides the strong base upon which the other three are based. In addition to being free from the pension assets test, your house may be used as a wealth store to increase your retirement income.
It’s evident from the government’s 2020 Retirement Income Review that one of the key components of living a modest—or better retirement lifestyle is having a mortgage-free house as opposed to renting.
At one point, downsizing might help free up money for extra retirement income. Alternatively, you may consider transferring the profits of the sale into your super fund, where they would be taxed at reduced rates or, after you retire and reach 60, completely tax free.
The percentage of Australian retirees who own their own house is around 75% (it rises to 82% for those aged 70–74), but the situation is not as good for the other 25%. Seniors who rent are finding their position even more precarious as housing affordability, rental vacancies, and rental affordability all continue to decline.
Also, the percentage of people who own a house is declining. The most recent government statistics show that more Australians are retiring with mortgage debt and that the percentage of pre-retirees aged 50 to 54 who are homeowners has decreased by 7.9% during the previous 25 years, from 80% to 72%.
- Your location
Retirement planning also involves location, which may significantly affect your cost of living. Capital cities often have greater costs of living than rural regions; Sydney is the most costly, followed by Canberra, Brisbane, and Melbourne.
Moving might be alluring if there are facilities and services that meet your demands. When estimating your retirement expenses, keep in mind that you may need to pay more for additional services or help around the house if your location is not convenient.
- Your lifestyle and age
Determine the services and activities that are essential to your general well-being. Is it possible to reduce expenses on things like vacations, meals, entertainment, and subscriptions? This comes easily to many retirees.
The ABS’s Household Expenditure Survey has shown that, during retirement, expenditure declines, particularly beyond the age of 75. In the ‘passive’ phase of retirement, which begins after age 75, even wealthy households tend to spend less on travel, dining out, and leisure activities.
The typical retired couple’s consumption decreases by more than one third (37%) as they age from their peak spending years in early retirement (65–69) to senior age (85+), according to research on Australian seniors.
In contrast, ASFA projects a lower decline in expenditure of around 9% for comfortable-living couples both before and beyond the age of 85.
