Splitting the sunset years into three stages may help you to better prepare for the financial demands of a long retirement.

Australians are living for longer than ever before, but our financial preparations for the retirement years still lag behind our dreams of taking a long European holiday or renovating the kitchen once we’ve stopped work for good.

Australian Institute of Health and Welfare research shows men aged 65 can expect to live until 84 and women of the same age can expect to live until the ripe age of 87. The average recent retirement age is 54 years, but most of the current over 45 cohort intends to retire between the ages of 65 and 69. So that could mean over 30 years in the various stages of retirement.

Worryingly, however, a new global survey by HSBC found that while Australians expect to live as retirees for 23 years, their superannuation – which for most couples totals around $300,000 on retirement – is likely to run out after 10 years. Better retirement planning is needed.

According to NGS Super financial planner Vince Zappia, there is a new school of thought that separates the retirement years into three stages – active, passive and frail, which are characterised by changing patterns of consumption – may help us plan for a more financially secure retirement. Here’s what you need to know about the expected costs and demands of each stage of retirement.

Active Retirement

During the active phase of retirement – generally up to the age of 75 – most people continue to live as they have during their pre-retirement years, swapping work with more time for family, hobbies and travel.

Most people are debt-free by this stage and may spend their disposable income on international travel or home renovations. Active retirees may also downsize from the family home to a smaller dwelling, and perhaps move from the suburbs of a capital city to a rural or regional area.

It’s also increasingly common for active retirees to remain in part-time work.

“The definition of retirement is changing as more flexible work arrangements come into place,” says Zappia. “We see that a lot in our industry, especially with teachers – they may do relief teaching or exam marking once they’re retired.”

In addition to part-time work, Zappia says most active retirees derive an income from multiple sources, including superannuation, the aged pension and investments like an investment property or share portfolio.

Health and the protection of assets also become more important than in previous years during the first stage of retirement.

“Health becomes a focus as the likelihood of illness increases,” says Zappia. “Active retirees are also looking to protect and preserve the assets and investments that they’ve accumulated over their working life. They’re concerned about the longevity of their investments to last their life expectancy and about replacing income through work with income via their investments.”

Passive retirement

The passive stage of retirement, often from ages 75 to 85, is usually characterised by moving into a smaller home, travelling closer to home, some unpaid charity work and more spending on health.

The majority of people will have ceased any part-time work and spending on hobbies and travel will gradually be exchanged for greater spending on health care.

“With the passive phase there’s more concern about health and people are also starting to think about aged care planning,” says Zappia. “They start to consider the options available to them – they might not be looking to go into assisted living straight away but they are slowly starting to look at the options.”

There is also more focus on estate planning. “People may start to look at the transfer of wealth from one generation to the other, and look at putting plans in place that may provide for future generations, such as a family trust,” says Zappia. “In this phase as retirement assets start to become depleted, entitlement to the age pension may start to increase.”

Frail retirement

Life undergoes significant changes during the frail period of retirement (from around age 85 onwards) as restricted mobility means leisure activities are limited and health costs increase, often accompanied by a move to a retirement village or nursing home.

If possible, Zappia recommends maintaining private health insurance throughout your retirement. “One of the important things through the whole retirement phase is keeping your private health insurance in place. By doing that you can [more easily] access services when and as you need them.”

“As you become more frail your requirements for more medical care will increase, and one of the things retirees need to consider is that the increase from year to year for medical care is a lot higher than the standard inflation rate. We have inflation running at just below two per cent, whereas costs for medical care have been increasing at around six per cent per annum.”

He also says many retirees don’t realise the high costs of care in an aged care facility – “The refundable deposit could be anywhere from $200,000 to $1,000,000,” says Zappia – so it’s important to factor these expenses into your retirement planning.

Information provided in this blog may have changed since the time of writing. You should confirm the information is current before relying on it.