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

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
4 Strategies to Reduce Taxes in Retirement
retirement planning

4 Strategies to Reduce Taxes in Retirement

Don’t let the possibility of higher taxes in the future sink your retirement income plan. Consider these four ways to help manage your taxes, keeping …
May 31, 2021
12 Housing Stocks to Ride the Red-Hot Market
investing

12 Housing Stocks to Ride the Red-Hot Market

The U.S. has a housing shortage and a love affair with home improvement, both of which could create tailwinds for this group of housing stocks.
June 8, 2021

Recommended

18 States With Scary Death Taxes
inheritance

18 States With Scary Death Taxes

Federal estate taxes are no longer a problem for all but the extremely wealthy, but several states have their own estate taxes and inheritance taxes t…
June 17, 2021
10 Least Tax-Friendly States for Retirees
retirement

10 Least Tax-Friendly States for Retirees

When it comes to state and local taxes, retirees in these states are likely to pay more than retirees in other states.
June 17, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
June 16, 2021
How to Generate Tax-Efficient Retirement Income
retirement planning

How to Generate Tax-Efficient Retirement Income

To limit your taxes, which accounts should you draw down sooner rather than later in retirement? The withdrawal strategy you decide to use could make …
June 15, 2021