Making Your Money Last

The 3 Spending Stages of Your Retirement

Popular thinking is that you’ll spend less once you retire, but that’s not what I’ve seen in my own clients, at least in the first few years.

How much money will you need throughout your retirement years?

No magic formula can give you a precise answer, but I believe you can estimate costs. I also believe you should plan for three distinct phases of retirement.

Phase One: Retirement to age 75.

In this phase, people tend to be very active. They travel, play golf and visit their grandkids. They’ve got energy, they’re on the go and they’re spending money. I’ve seen articles that say retirees’ cost of living will go down 40%, but that’s not what I’ve witnessed in my clients’ lives. Whatever money people spent on working (the commute, lunches, clothes, etc.) after retirement is spent on cruises, hobbies and fun. In fact, during this initial phase of retirement, costs for retirees typically go up.

I suggest planning for your cost-of-living to rise 4% per year in Phase One. That may sound like a very aggressive rate, but I believe in overestimating on all possible costs and underestimating on income. If you do that and reality is better than planned, your financial plan will be better than planned, too.

Phase Two: Age 75–85.

Retirees are still active in this phase, but they’ve slowed down. They’ve done a lot of the things they’d planned for retirement, and though they’re still traveling and pursing hobbies, they’re also settling into routines at home. Although people are still spending in this phase, the cost of living typically plateaus. I’d plan for an increase of 3% per year to be conservative. We want to overestimate our expenses in the planning process so that reality should be better than the plan.

Phase Three: Age 85 plus.

In this third phase of retirement, people tend to spend more time at home and with their families, and costs go down (as long as health problems are not an issue). It can be a good time to think about the legacy you’ll leave, and even to begin transitioning some of your wealth to heirs, but once again, so as to be conservative, I also suggest you continue to build in a cost-of-living increase of 2% a year. When planning for our clients, we try to overestimate on the bad stuff and underestimate on the good stuff. The idea being that, if we are OK under that scenario, we should be OK under something better.

Having worked with retirees for many years, I’ve seen hundreds of people go through these three phases. One client defined them this way: “Phase One is golf, golf, golf. Phase Two is golf, golf. Phase Three is golf.” No matter how you define the phases, I think you’ll agree that most people’s interests, abilities and spending habits change during retirement, that yours probably will, too, and that it’s wise to take that into account when estimating your retirement costs.

About the Author

Ken Moraif, CFP®

CEO and Senior Adviser, Retirement Planners of America

Ken Moraif, CFP, is CEO and senior adviser at Retirement Planners of America, a Dallas-based wealth management and investment firm with over $4.3 billion in AUM and serving over 8,000 households (as of May 2019). He is also the host of the radio show "Money Matters with Ken Moraif," which has offered listeners retirement, investing and personal finance advice since 1996.

Most Popular

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math
retirement planning

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math

The math isn’t as tough as you might think. It all starts with dividing your assets into three different buckets.
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is heading back toward its March highs. What’s driving the resurgence, and will gas prices go down anytime soon?
May 23, 2022

Recommended

This Couple Tackles Love and Money as a Team
Getting Married

This Couple Tackles Love and Money as a Team

Fyooz Financial, the husband and wife team of Dan and Natalie Slagle, have carved out a niche advising other couples with the money questions that com…
May 24, 2022
How to Find the Perfect Balance Between Spending and Saving
retirement

How to Find the Perfect Balance Between Spending and Saving

It's the key to being able to enjoy life now AND in the future. It's also the basis for a successful retirement plan, and it all starts with setting y…
May 24, 2022
Education is Key: 3 Financial Lessons for Retirees Nearing Retirement
retirement planning

Education is Key: 3 Financial Lessons for Retirees Nearing Retirement

When it comes to retirement planning, educating yourself can keep you from making big mistakes. Here are three key lessons that everyone preparing for…
May 24, 2022
Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math
retirement planning

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math

The math isn’t as tough as you might think. It all starts with dividing your assets into three different buckets.
May 23, 2022