The silver tsunami: how retirees are planning for their future

Dr Yuanyuan Gu
Michael Yiannakis
13 February 2020
Macquarie Business School


Australia’s ageing population may outlive retirement savings as baby boomers opt to maintain their lifestyle rather than plan for future health care needs.

While Australian retirees are accumulating record levels of retirement savings in order to generate retirement income, research has found that many value leisure spending over long-term health and care requirements.

Dr Yuanyuan Gu, a Senior Research Fellow at the Centre for the Health Economy at the Macquarie Business School, says as health improvements have extended life expectancy and the period of active retirement, older people tend to engage with their communities for longer and seek leisure activities such as travel in their retirement.

Australia is experiencing rapid population ageing. By 2055, the number of Australians aged 65 and over will more than double, and 5 per cent of the population will live beyond the age of 85, according to the Department of the Treasury.

This longer retirement period generates considerable pressure on both retirees and society to finance retirement needs. But apart from essential expenses, retirees are emphasising the importance of funding leisure pursuits, such as travel and social activities.

Retirees greatly value leisure and actively maintain their health, but often miss opportunities to financially plan for future health and aged care needs.

Gu collaborated on research of retirement income with Dr Barbara Chambers from Monash Business School, Associate Professor Ruth Walker from Flinders University and Dr Jun Feng from the ARC Centre of Excellence in Population Ageing Research.

The paper, The Silver Tsunami: An Enquiry into the Financial Needs, Preferences and Behaviours of Retirees, examines where retirees spend their money, their sources of retirement funding, and the interaction between health status and financial planning for retirement.

The Australian Prudential Regulation Authority says superannuation funds paid out $76 billion in retirement benefits in the 2019 financial year compared to only $50 billion in 2013. As retiree numbers continue to increase, that growth rate is likely to continue.

Retirees’ FOMO

They found that as the baby boomer generation leaves the workforce, the conversion of savings to an adequate and sustainable retirement income has become increasingly important.

The paper says uncertainty drives retirees to seek protection from various risks, such as investment and longevity risks. However, the fear of missing out substantially reduces retirees’ desire for risk protection.

“Retirees greatly value leisure and actively maintain their health, but often miss opportunities to financially plan for future health and aged care needs,” Gu says.

“In addition to ‘essential’ household expenses, lifestyle expenditures form a critical part of the household budget.”

Diverse demographics, socio-economic backgrounds and life experiences predict that preferences for income product for retirement (IPR) features differ considerably among retirees.

Some retirees value spending on socialising or entertainment, and this participation in leisure and social activities is positively correlated with older adults’ psychosocial well-being, health and survival.

The paper says many participants consider leisure spending, especially travel, an important retirement expenditure. Retirement substantially increases free time, and retired households have significantly higher leisure expenditures than non-retired households.

While retirees spend on big-ticket items such as car upgrades and overseas travel, some also allocate significant financial resources to keeping healthy and plan to have enough money to cover unplanned big-ticket items.

“The transition from work to retirement means retirees have more time to participate in other activities but lose wage income. The transition often leads to changes in expenditures and trade-offs. Some participants were concerned about the changes they needed to make to reduce spending when they retired,” the report says.

Stretching the dollar

Gu says most retirees in the study recognise that their overall expenditures might not drastically change, but declining health could increase their medical bills or assisted living costs. However, he says many participants believe prevention is more important than allocating resources for health-related needs in later years.

“Rather than keep money aside for changes in health or independence, they feel the need to focus on maintaining their health and vitality while they can,” Gu says.

“Instead of planning ahead for increased health costs, participants focus on an active lifestyle and healthy foods to maintain health.”

Some retirees insist they will cut their entertainment spending if necessary, while others say they will be able to apply for support from local government programs.

There are concerns over how long they will live, making it difficult to calculate how much they should be currently spending.

A major concern for retirees centres around outliving their savings and eating into their financial reserves.

“There is a strong desire and acknowledgment of the need to ‘stretch it out’ and concerns over how long they will live, making it difficult to calculate how much they should be currently spending,” Gu says.

“Participants expect health spending to increase as retirement progresses but total spending to remain constant. Rather than plan for increased healthcare costs that result from frailty and infirmity in later retirement, participants would reduce other expenditures to meet increased healthcare expenses.”

Longevity risk

The increase in life expectancy at birth is due to declining death rates at all ages. People are living longer due to advances in medical treatments and drugs, as well as a reduction in certain risk factors.

According to the Australian Bureau of Statistics, the life expectancy of a newborn boy has increased by 14 years over the past 50 years – from 66.1 years (for those born between 1946-48) to 80.1 years (for those born between 2011-13). Likewise, the life expectancy of a newborn girl has increased from 70.6 to 84.3 years.

With a growing ageing population and increased life expectancies, a key issue facing government is how to support retirees with fewer people working.

To offset a reliance on government support, retirees’ own funds become important along with the question of how to convert retirement savings into an adequate and sustainable retirement income.

The paper concludes that “good IPR design can increase retiree welfare through the better management of longevity risk and the reduction of precautionary savings motives, such as the provision of medical and aged care expenses”.

Dr Yuanyuan Gu is a Senior Research Fellow at the Centre for the Health Economy at the Macquarie Business School.


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