The Impact of Sydney’s Cost of Living on Retirees
Knowing how much we need for retirement life is a constant hot topic for retirees in Australia.
The superannuation industry association ASFA has been offering an online Retirement Standard and budget analysis since 2004.
Three main categories are presented by The Standard using common terms: a pleasant retirement, a frugal retirement, and one based only on the pension.
Sufficient funds for home maintenance, sporadic vacations, including visits abroad, a nice vehicle, frequent leisure and lifestyle pursuits, and several other luxuries that are part of everyday life are all necessary for a pleasant retirement. A decent lifestyle is predicted to cost $71,723 annually for couples between the ages of 65 and 84. An individual living alone should budget $50,981 annually.
A modest retirement means making sacrifices in some or many of these areas, spending less on certain things while still being able to own a vehicle, take part in most leisure activities, and travel occasionally. A moderate lifestyle for a couple between the ages of 65 and 84 is projected to cost around $46,620 annually. An individual living alone should budget $32,417 annually.
A Pension-based retirement often offers a modest lifestyle on a tight budget, with the majority of basic expenditure restricted to necessities. The annual income from an Age Pension is around $28,514 for individuals and $42,988 for couples.
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.
- Costs for a couple, single person, male, and female
Living alone in retirement is more expensive than living with a spouse since, for example, the cost of housing, electricity, and car maintenance is the same for both. Age Pension rates show this, with the payment for a single retiree (now $28,514) being more than half that of a couple ($42,988).
This increases the likelihood of financial difficulty for single retirees, particularly for those who have rent to pay. The difference between the Age Pension and ASFA’s “modest” budget is higher for single people than for couples, as the chart previously in this piece illustrates.
When it comes to retirement income planning, gender is another crucial consideration. Men and women have similar income requirements, but women often have less disposable income.
- How old are you going to be?
Knowing how long your money needs to last is a big uncertainty when estimating how much income you will likely need in retirement.
The average lifespan for a 65-year-old man and woman today is 85 and 87, respectively, with half of them expected to live even longer. Investing in an annuity-style investment product that will provide monthly income until your death is one method to manage this uncertainty.
