Aussie retirees are more frugal than they need to be. What can be done?
The Federal Government faces an uphill battle to make retired Australians spend more. Let's hope they don't go overboard.
Several Government reviews have highlighted how retirees tend to be more frugal than they need to be.
In 2020, Treasury’s Retirement Income Review said that around 90% of retirees drew the minimum amount required and died with much of their super balances untouched. The review revealed that retirees lack the confidence and support to spend their savings, resulting in a poorer quality of life in retirement.
It suggested that the problem would become more pronounced going forward as people retire with larger superannuation balances. It also included projections that outstanding superannuation death benefits could increase from around $17 billion in 2019 to just under $130 billion in 2059, assuming there’s no change in how retirees draw down their superannuation balances.
Figure 1: Projected value of superannuation death benefits. Source: Treasury
The Intergenerational Report 2023 found that outliving one’s savings is a key concern for retirees in deciding how to draw down their superannuation, and that’s why many retirees draw down at the legislated minimum drawdown rates.
How retiree spending changes as we age
In an article in Firstlinks last year, actuary Ruvinda Nanayakkara outlined how spending in retirement varies for different age bands.
Using bank spending data, he looked at the percentage change in retirement spending, using the age 60-64 age band as the base year, and considering the relative decrease in retirement spending for older age bands.
He found that for all affluence levels, there is a consistent reduction in spending across the age bands. In the ‘low affluence’ group, individuals aged 75+ spent approximately 15% less than those aged 60-64. This reduction is even more pronounced for the higher affluent levels, with spending at age 75+ band reducing 20-25% of the spending levels observed at age 60-64.
Figure 2: Percentage change in retirement spending by age. Source: Spirit Super
For both ‘high affluence’ and ‘low affluence’ groups, spending across most categories gradually decreases across the age bands, except for health-related expenses and cash withdrawals.
Figures 3 and 4: Spending by category for low and high affluence retirees. Source: Spirit Super
Explanations for frugality
Why aren’t retirees spending more? It seems much of it stems from uncertainty about the future. That uncertainty includes longevity risk, rising healthcare costs, financial market returns, inflation, interest rates, and sequencing risk.
Another growing risk less mentioned is Government risk, with potential threats to Aged Pension funding, and further tightening of superannuation rules.
There’s also the desire to leave wealth to children, especially given the cost-of-living crisis disproportionately impacting younger generations.
Other explanations
I’ve always thought that there may be deeper, psychological reasons for retirees underspending and recent research lends some support to this.
Scott Rick, an associate professor at the University of Michigan, suggests that there are three types of people when it comes to money: tightwads, spendthrifts, and those in between. He says tightwads and spendthrifts make up a disproportionate percentage of the population:
“Tightwads” experience too much pain when considering spending and therefore spend less than they would ideally like to spend. By contrast, “spendthrifts” experience too little pain and therefore spend more than they would ideally like to spend. Neither are happy with how they handle money.”
Rick’s research reveals that tightwads tend to be older than spendthrifts and that men are more likely to be tightwads. Tightwads are more highly educated and numbers oriented than spendthrifts.
Rick says that being a tightwad isn’t the same as being frugal as “the highly frugal love to save, and tightwads hate to spend.” And, “the highly frugal are generally much more at peace in their relationship with money than are tightwads.”
Tightwads have far more in savings than spendthrifts and think in terms of opportunity costs when considering spending money. The high savings offer “no guarantee that tightwads feel financially comfortable. Subjective feelings of financial well-being are only loosely related to objective aspects of financial well-being.”
On the other hand, spendthrifts are more impatient than tightwads and report a high susceptibility to shopping momentum ie. going to buy one thing and then getting carried away. And though spendthrifts have lower financial literacy on average, it isn’t markedly different from the rest of the population.
One of the most fascinating findings is that as younger children, we tend to be more tightwads, this changes somewhat as we enter adulthood, but by the time that we become adults, we commonly revert to what our parents are on the tightwad-spendthrift spectrum. Put simply, our attitudes and emotions toward money as adults seem to follow those of our parents, whether we like it or not!
Possible solutions
The Federal Government is intent on getting retirees to spend more money. It wants those billions or trillions of dollars flowing in the economy, spurring GDP growth.
The Government recognizes that financial advice is one area that could help reduce the fear for retirees of running out of money. Hence, why it’s trying to reduce the cost of advice and pressuring superannuation funds to do more for its members in retirement.
The Government moves are supported by recent research from Vanguard which found that having high retirement confidence isn’t dependent on age or income, but rather on having a plan, and financial advice has a large role to play in that.
Low cost advice has obvious merit, though Scott Rick’s findings highlight how difficult it will be to change retiree spending habits. Let’s hope the Government doesn’t go overboard with any future ‘nudges’, or legislative solutions.
