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When actuarial consultant Milliman looked at the spending patterns of 300,000 retirees it found that the median annual spend for a couple fell by 36.7 per cent as they move from their peak spending years into their mid-80s.

The peak spending years in retirement are aged 65 to 69, when the average annual spend for couples is around $44,000.

Milliman found that from there spending declines by 6 to 8 per cent a year through the 70s and early 80s but then drops more sharply after age 85, when the average drops to around $25,000.

Milliman senior consultant Jeff Gebler says the financial services industry may have underestimated the dramatic fall-off in retiree spending in old age.

Gebler says: “The revelation undermines common practices, such as linking pension products to a rising consumer price index, as well as industry assumptions, such as the 70 per cent replacement ratio for retirement income.

“The result is many retirees are holding money back for future years when they will never spend it.”

The Association of Superannuation Funds of Australia has estimated that a couple over age 85 will spend about 8 per cent less than a younger retired couple, while the Australian Institute of Superannuation Trustees has suggested that spending may not decline materially through retirement.

Gebler says the difference in estimates is due to the fact that Milliman’s Retirement Expectations and Spending Profiles analysis is the first based on the actual spending of retirees. Milliman’s figures come from data company Quantium, which receives de-identified spending information from banks.

Milliman found that all discretionary spending, such as travel and leisure, declines steadily throughout retirement. Spending on food, the biggest component of essential spending, declines steeply with age.

Health spending increases through the 60s and 70s but dips after age 80. The actual health cost continues to go up but more and more of it is covered by the public system as people get older.

“Financial plans and products should reflect these expenditures over time, as well as the greater risks (such as market downturns) and uncertainties (such as health events) that retirees face, compared to the broader population,” Gebler says.

“However, many products aimed at retirees assume that their spending will rise in line with CPI. More than half of all balanced pension funds rank their performance against CPI.”

He is concerned that the Treasury framework for Comprehensive Income Products for Retirement, a set of rules that is being finalised, calls for retirement income products to be linked to CPI.