Milliman: Spending patterns and asset levels matter for retirement planning

Transactional data from large institutions shows age is a great leveller in terms of spending patterns of people regardless of their level of affluence.

According to Milliman Principal and Leader of Australian operations Wade Matterson, spending patterns of different socio-economic groups converge as we age and we become more similar in our needs and wants.

As we grow older we are more willing to stay closer to home and to spend time with the family, reducing our spending. While wealthier groups continue to spend more than their less affluent counterparts, the gap gets smaller with age.

However, the overall spending trajectory of a retiree, whether it is stable, increasing or decreasing over time – as the data suggests, can have a dramatic impact on investor portfolios.

Milliman demonstrated the impact by conducting actuarial analysis on a $1 million pension balance allowing for annual withdrawals of $50,000 per annum following three different spending trajectories.

1. Constant annual withdrawals
2. Increasing the withdrawal by 3% each year
3. Decreasing the withdrawal by 3% each year

“Increasing withdrawals, a traditional approach, sees assets extinguished after 23 years,” said Matterson. “Allowing for a constant income, it lasts well beyond 30 years. Meanwhile, if you assume spending declines, you never run out of money and you end up with more money.”

Matterson said the last outcome is confirmed by superannuation data which shows many superannuants still have large balances when they die.

This analysis confirms two dynamics:

1. If spending declines and plans allow for an increase in spending over time, there is a level of conservatism that helps offset market shocks;
2. Changing spending patterns will impact how long money will last and can be used as a strategy to adapt to changing market conditions.

In the current crisis, this means if clients do change their spending patterns, this will benefit the longevity of their funds.

Milliman also analysed the value of aged pension for people with different levels of assets but impacted by a market correction. It found for a couple with $1 million in assets under normal circumstances, the present value of their age pension entitlements was approximately $180,000, under a scenario where their assets declined in value by 30%, the present value of their aged pension entitlements rose to $500,000 as a result of the interaction of the assets and means testing regime.

“This offsets a market correction for certain cohorts and can provide a buffer to retirement income in a downturn,” said Matterson. “This means the aged pension and its increased value for those within the means test taper zone can be somewhat of a positive story.”

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Hear from Milliman‘s Wade Matterson as he presents research identifying what pre-retirees and retirees need to know in order to navigate through the noise in the current market. Watch the webinar here. 

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