The retirement smile

We recently sat down with Julia Maciver, UniSuper’s Assistant Product Manager, to learn more about a reasonably new term we’re hearing lately—the 'retirement smile'.


What is the retirement smile?

Our members would probably be familiar with a bell curve. The retirement smile is a kind of inverted bell curve which represents the general pattern of people's spending in retirement. The idea is that spending is high at the beginning of retirement, it tapers off in the middle and then spikes again at the end. It's a particularly useful way of illustrating people’s expected income needs in retirement.

How does it work?

When people initially retire, they’re still quite active—they've generally got quite high income needs because they're going on the overseas trips, they're renovating the house, buying presents for the grandkids. But then, as they get a bit older, they start to slow down a bit, so their income needs drop off—they might go out for dinner less or scale back long-haul travel. And then, further down the track, healthcare needs and aged care costs can come into play. So you end up with a sort of smile-shaped curve of how much money people need as they get older.

For some people, the retirement smile might be on the horizon—but what might people at the beginning of their working lives be able to learn from it?

Some research has shown that the younger generations in Australia are particularly optimistic about what their retirement is going to be like1. But the experience of the older generation shows that in some instances, that’s not always the case—plus, putting away a little bit extra for retirement may be harder with rising housing costs and other cost-of-living increases. We often encourage members to consider starting to save a little bit earlier for retirement because of the benefits of compound interest. While markets will always go up and down, any money saved earlier is generally worth a lot more when people do get to retirement, because the earnings can earn them money.

Are there any ways to avoid the retirement smile, or at least better prepare for it?

It's probably worth mentioning that some people will never hit the retirement smile. Retirement is different for everyone. The best thing people can do is go and seek some advice and figure out what they’re spending now. Take a look at their finances, figure out what they’re spending money on, and how much of that they’re going to want to be spending when they're in retirement—sort of reverse engineer how much income they’re going to need. Maybe even look at their parents' experience and see what they've needed as well.

Where you are today can give you a picture of where you might be tomorrow.

Check out our retirement adequacy calculator to work out how much super you might have when you retire and what kind of income this could provide once retired.

1 2015, State Street Global Advisors, 'The Australian retirement vision survey'