Milliman practice leader Wade Matterson thinks the Australian wealth industry should be called to account for creating a raft of "very cheap, generic retirement income products based on a lot of averages."
Matterson explained that Milliman analyses real-life spending patterns and has determined that "behavior differs considerably based on a range of factors. A retiree living in Mosman spends a very different amount to a retiree in Blacktown."
He noted that while the Association of Superannuation Funds of Australia positions its "comfortable" Retirement Standard at $44,011 per annum for a single person aged around 65 and $60,457 for a couple, the vast majority of retirees Milliman surveyed spend less than that.
Furthermore, when attempting to gauge people's realistic expectations of how much they need to fund their retirement, these numbers vary considerably based on location and lifestyle expectations. This, in turn, has significant impacts on products and solutions for managing longevity and sequencing risk.
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This idea was expanded upon in a recent article by Milliman financial risk management consultant Jeff Gebler, who argued that behavioural economics "has revealed the vast gulf that exists between what people say they want and how they behave."
To illustrate this, Gebler compared data from the Household Income and Labour Dynamics in Australia (HILDA) and Milliman's Expectations and Spending Profiles (ESP) Report. HILDA surveys about 9500 Australian households, but Gebler said "spending surveys of this nature have shortcomings when applied to the context of financial planning, which are revealed by Retirement ESP."
As an example, he said that median expenditure for households aged 65-69 was $24,640 per annum, while the average was $33,944. The Retirement ESP sources bank transaction data from over 300,000 retirees, and shows that the median couple in this bracket spends $34,858 each year while the average expenditure was $43,675.
"This is a significant difference even when accounting for the different time periods of the underlying data (2015 versus 2017)," Gebler wrote.
The HILDA data revealed other consistencies, given that it's based on people self-reporting their spending habits. In the 2015 survey, 2527 people said they smoked at least one cigarette per week, even though 38% of those people also said they spent no money each week on cigarettes. The HILDA data also revealed the average number of cigarettes smoked per week was 78 and 2015, and the average amount spent on them each week was $82.
"This implies that individuals underreport the cost of smoking by almost 15%," Gebler said.
The point of this is that while balancing spending expectations against actual spending habits is a key challenge for any financial planning client, it's especially important for retirees, who are drawing income from a mix of investments and pensions - a mix that is, in many cases, susceptible and vulnerable to market movements.
This is an excerpt from the Financial Standard feature "Opportunity costs: new approaches to building retirement income." Read the full version via our iPad app.