The Three Phases of Spending in Retirement

While retirement is a significant milestone, it’s important to remember that it doesn’t mark the end of your journey, but the beginning of the next phase of your life. Ideally, you can enjoy this phase for several decades. With our lengthening lifespans, spending becomes a key consideration. While you don’t want to overspend, you also don’t want to be afraid to spend the money you worked hard to accumulate for this exciting new chapter. Achieving the right balance begins with understanding the three phases of spending in retirement, based on approximate age ranges.

Phase 1: The Go-Go Years (ages 60 - 74). For most people, this stage of retirement tends to be the most active. Free from the constraints of work and raising a family, many retirees spend more time and money on travel and entertainment, family excursions, and social activities. Large expenditures like purchasing an RV, second home, a bucket list trip, or paying off a mortgage may figure prominently. As a result, many retirees will need at least 80% or more of their pre-retirement income to support their lifestyles.

TIP: Overspending at this stage can lead to a reduction in investment principal needed to generate additional income in the later stages of retirement. Work with your financial professional to assess your need for guaranteed income to support your goals at each stage of your life in retirement. 

Phase 2: The Slow-Go Years (ages 75 - 84). Spending tends to level off in mid-retirement for a number of reasons, such as paying off a mortgage, downsizing living arrangements, or selling a second car or vacation home that you no longer use. Health challenges or the loss of a spouse can also lead to a less active lifestyle, which may translate to lower spending on travel and entertainment. Many people may find travel and transportation more challenging, resulting in spending more time at home. While spending on the "go-go" things may decrease, you may find that healthcare expenses increase at this time. 

TIP: This is a good time for an insurance and estate planning review to account for significant life changes such as the death of a spouse. Start your estate review before you experience significant health challenges. 

Phase 3: The No-Go Years (age 85+). Spending tends to pick up again in late retirement, primarily due to increased healthcare expenses associated with aging, including copays and medical equipment that may not be covered by Medicare, and long-term care services that Medicare does not cover. While many retirees remain active and independent well into their 90s, even those in good health may see an increase in daily living expenses due to the need for assistance with cleaning, lawn services, grocery shopping, cooking, or transportation. Others may experience an increase in housing costs if they choose to move to an assisted living facility or active senior community.

TIP: Work with your financial professional before you retire - ideally at least five years prior to retirement - or as early as possible to put a strategy in place for how you will pay for any long-term care expenses you may incur. Securing long-term care insurance while you are still healthy is essential. 

To learn more about strategies for generating a lifetime income to support your spending needs and goals in retirement, call my office to schedule a time to talk or select a time on my calendar: www.calendly.com/kfn.