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Three Phases of Retirement Spending

There are fewer hot topics in retirement planning than how much you should expect to spend once you retire. On the one hand, you won’t be spending for work-related activities so maybe you will spend less. On the other hand, health care costs will likely rise until you are eligible for Medicare. You may think you’ll eat out less when you retire because you’ll have time to cook at home more. On the other hand, you’ll travel more. You may think you will downsize your house or pay off the mortgage once you retire, but on the other hand, you’ll spend more on hobbies. You get the idea. There are “spend more” ideas and “spend less” ideas. So what is the right answer?

First, it depends on your choices so broad generalities are only guidelines. However, we see some patterns in the spending habits of our clients. They seem to go through three phases:

Phase I: the “go-go years“; this is when recent retirees may actually spend more than when they were working because of post-poned travel, adventures, visit to the grand kids, etc. This phase lasts about 15 years.

Phase II: the “slow go years“; this phase is characterized by less ambitious adventures and more local activity that are usually lower in cost; as one client put it, “I’m not hiking the hardest routes anymore and not trying to ski the black diamond runs either.” Phase II lasts for 15-20 years.

Phase III: end of life; in this phase, retirees spend more due to long-term care and health care related expenses. This phase lasts for 1-5 years typically, although if there is a mental related condition like Alzheimer’s disease, it can last longer.

Think of the spending in these three phases like a crooked smile. Up on both ends with a dip in the middle.