Cost of living in retirement: What is it and how can you live within your means

Over the past two years the cost of living for Australian households has risen dramatically, fuelled by higher inflation. Those who are still in the workforce may have also received pay increases which means their ability to cover higher prices is somewhat protected.

But retirement incomes don’t always increase in line with higher prices. It helps to understand the background to the cost of living and the actions you can take to ensure control of your retirement affordability.

Recent research from advocacy group, the National Seniors Association (NSA) confirms what most retirees already know – the increasing cost of living is negatively affecting their lifestyle, finances and sense of financial security. 

But should this be the case? Other research from the CommBank seems to challenge the notion of older Australians doing it tough. CommBank IQ spending data released in November 2023 suggests that over 65s are the only demographic continuing to increase discretionary spending, noting:

• Essential spending by Australians aged 65 and older rose by 5.5 per cent to $1518 per month
• Discretionary spending increased 7.2 per cent to $1176 per month

So how do we reconcile these seemingly opposite sets of findings?  As with most research, the answers we receive usually depend upon the questions we ask.  And while the answers can be useful as benchmarks, every retirement is different, and so too is every retirement household budget.

The most reliable way of knowing the cost of living in Australia is to seek out the most objectively measured statistics (i.e. the Australian Bureau of Statistics) and the way these results can affect different age groups.

How much has the cost of living increased?

The most widely accepted measure of cost of living is that of the Consumer Price Index which is usually reported on a monthly and annual (year-on-year) basis. At the time of writing, in November 2023,  prices in Australia had risen 4.9% over the previous 12 months (to October 31). 

Is the cost of living in retirement different?

There are many reasons why typical household expenditure in retirement differs from that of other households.

The obvious factors that influence younger households such as child care, education, commuting expenses and family holiday expenses tend to evaporate when people step back from full-time work.

For this reason, there are two different quarterly indexes which the Australian Bureau of Statistics produces:

• the Pensioner and Beneficiary Living Cost Index (PBLCI).
• the Self-funded Retiree Living Cost Index (Self-funded Retiree LCI)

Age Pension recipients have a cost of living buffer

The good news for the 67% of older Australians on a full or part Age Pension is that they are protected from the rising cost of living to a certain extent.

This is because the Age Pension is indexed twice a year, against three key measures:

• The Consumer Price Index
• The Pensioner and Beneficiary LCI 
• Male Total Average Weekly Earnings

The base rate of the Age Pension and its associated supplement are then adjusted to reflect any increases across the higher of the above measures, which means that Age Pension payments do tend to stay in touch with other forms of income as well as price inflation.

How do you reduce your living expenses?

Regardless of whether you are on a full or part Age Pension or self-funded in retirement, you will still have noticed some prices going up more than others. These might include fuel costs, insurance premiums, rent and certain grocery items.

Some of these items are essential, others could be considered discretionary. But as reported in the NSA survey, there is a very real sense among retirees that prices are out of control. And this can lead to the widespread concern known as FORO, or Fear Of Running Out (of money). 

Start by knowing how much you spend

The two most widely recognised measures of typical spending for retiree households are the ASFA Retirement Standard and Super Consumers Australia retirement targets which suggest different levels of weekly spends.

They can be useful as benchmarks, but as every retirement is different, so too is every retirement household budget.

Comparing your spending to these benchmarks is worthwhile, however, as it may help to identify if you have a blowout in one particular category.

For instance, you may be spending a lot more on entertainment or holidays. Well at least you know this is discretionary and something you can dial back if need be. But if you are spending double or triple the amount on energy, it’s a helpful prompt to check your supplier, charges and current consumption. 

Are you overspending?

Knowing how much you are earning is important; knowing how much you spend is essential. And checking that the gap between the two is sustainable is similarly critical.  

The obvious point here is that, to compare your own household expenses, you will need to be on top of where the money is going. Budgeting may not seem to be the most exciting task on your to-do list, but knowing how much you spend is the first step to a sense of financial control.

It’s an easier exercise than it used to be with most banks offering categorised spending Apps and reports which save you doing the maths. The government’s Moneysmart website offers a really helpful budget tool as well.

If you are measuring your spending you can also compare your own household cost increases or decreases against those of both the CPI and the PBLCI or Self-funded LCI. This gives you accurate information for any reviews of your spending and cutbacks you feel you could need to make.

How can retirees reduce their cost of living?

There are many ways to rethink your expenditure and ways to curtail it. In fact, it would take a book or two to cover them.

In essence, however, this exercise will depend upon your situation and whether you are spending only on essentials (food, fuel, energy and housing). Or if you are spending a lot on discretionary items (clothing, dining out, holidays, etc… ) which might be more easily reduced.

Taking a recent bank statement and marking up the items which are:

• essential 
• important but could be reduced, or 
• totally discretionary

It will allow you to better understand your options when it comes to cutting back. Other strategies include reviewing your food purchases (do you only buy fruit and vegetables in season, for instance?), your food usage and storage (are you, like most Australian households, throwing out rotting vegetables or other items past their use-by dates?)

Thinking about where and how you shop is a powerful exercise. There are lots of other useful ways of saving at the supermarket on the Choice website. 

A recent trend in Australia is the rising number of seniors retiring with a bank mortgage. Now over one third of Australians retire with some form of mortgage and making the principal and interest repayments is certainly not discretionary. 

So taking stock of your mortgage in retirement should form part of any assessment of retirement spending.

Will the current cost of living spike threaten your retirement?

As noted above, the major source of income for the majority of Australians on an Age Pension is partially protected by indexation which takes price increases into account. Not everyone has such protection, but it’s useful for all retirees to take a holistic view of retirement funding.

Across the course of their retirement, most older Australians will consider tapping into one of the three pillars of retirement funding. These are:

• Age Pension 
• Superannuation
• Private savings and investment including home equity

In addition to these, Australian retirees should understand their additional entitlements such as a health care card and take stock of the paid and unpaid work they plan to undertake.

At different ages and stages, retirees will access one or more of these sources of funding. Knowing that the Age Pension offers a universal safety net is reassuring. Those with superannuation are able to top up any pension entitlements along the way.

The same is true of private investments and the decision to continue to work, at least part time. And then there is the biggest ‘pot’ of savings, the wealth that many Australians have invested in their home.

Household Capital CEO, Dr Joshua Funder, says the increased cost of living means that many older Australians are giving up a comfortable lifestyle simply to afford the essentials. He notes there's a huge education gap about what measures can be taken to alleviate the burden created by the current economic climate on older Australians.

‘Many retirees are going backwards and struggling to keep up with the cost of living,’ said Dr Funder.  ‘In other cases retirees are struggling to keep up the repayments on their mortgage since interest rates have risen so much.’

How your home equity can help

‘Over 75% of retirees are homeowners. What many Australians don't realise is that they can use the wealth  or 'equity' built up in their home to both guarantee their retirement housing and to improve their retirement lifestyle, lessening their financial stress and making the most of their retirement,’ he said.

‘Median household superannuation for retirees is still less than $200,000 and with a low growth outlook, it’s uncertain that this will go the distance and fund an adequate retirement for senior Australians,” said Funder. “Drawing heavily on superannuation accounts now to meet the rising cost of living will leave a lot less to rebound down the track.’

Household Capital has seen an increase in enquiries over recent months, as Australians look to access their home equity and offset increased costs with a Household Loan (a responsible, retirement-funding reverse mortgage).

However, Dr Funder says there's still a long way to go in empowering Australians to utilise the wealth built up in their home to better their retirement living for themselves and their families.

Find out more about home equity

‘The role of the house in retirement is largely not understood. We want to champion homeowners to realise how wealthy they are and how the savings they already have, that they can be proud of, can provide them with the freedom and flexibility to enjoy a comfortable retirement.

‘Retirees should feel empowered to access their pension, superannuation and home equity throughout retirement to get the best out of their savings and have confidence in the long-term lifestyle they deserve.

‘Whether it's setting up a regular income stream to top up income from a super fund or pension, establishing a contingency fund in case of unforeseen expenses, or paying off an existing mortgage to free up cash flow, home equity can be used to ensure that an existing income does not have to stretch to cover day to day expenses or that super accounts are not depleted in the short term," said Dr Funder.

If you’re wondering how home equity could improve your retirement funding, see how much equity you could access with our free to use equity calculator or download our home equity eGuide today.