How much should people spend in retirement? There have been claims that many retirees should spend much more of their savings than they do. One Government report says retirees do not spend down their savings for many reasons, and it is unclear which are the most important.

One reason is that people spend less on eating out, entertainment and alcohol as they age. They also replace clothing and furniture less often. Retirees also receive more government subsidies for health and welfare, so don’t need to spend as much of their own money.

Statistics show most retirees are not broke when they pass away. Undoubtedly some spend less than they could because they fear running out of money. They don’t know how long they will live. It could be much longer than average. Longevity risk is the risk of outliving one’s savings.

Some retirees choose not to live extravagantly in retirement because they wish to preserve capital for their children. They worked hard to accumulate those savings and don’t want to waste them.

Superannuation is a major part of most retiree’s savings. The Government says it is not designed to be used for intergenerational wealth transfer. It is designed to save for retirement, then be spent in retirement.

The Government would like to see more retirees allocate more of their savings to guaranteed lifetime income products such as lifetime annuities. These guarantee an income at a set rate until the person passes on.

To encourage this the Government introduced the Capital Access Schedule (CAS). This grants partial Centrelink means test exemptions to products that provide assured income for life and limit withdrawals to specific levels. Hence those who invest in them usually receive larger age pensions.

Those increased age pensions can mean more savings accumulate in retirement for the benefit of the retiree’s children later.

There has been some take-up of these lifetime income products, but it hasn’t been huge. Retirees hesitate because they think they may need access to large cash amounts, such as for family emergencies or aged care.

Several companies now offer products that comply with the CAS, including AMP, Generation Life and Allianz. These can mean more age pension and still give access to capital in the early years. Not all a retiree’s savings need be invested in them. Some can be in fully accessible retirement income products.

A retirement plan that provides assured income for life, but also keeps capital accessible for costs such as aged care, will enable retirees to confidently spend more. Financial planners can help develop such plans.