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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
-
Stock Market Today: Solid Signals Lift Stocks Despite Tariff NoiseMarkets are whistling over the White House in an ongoing display of corporate America's enduring ability to survive and advance.
-
Amtrak Joins Prime Day With Deals on Fares — But You’ll Have to Act FastPrime members can score 20% off midweek fares — what travelers should know before booking.
-
Key to Financial Peace of Mind: Think 'What's Next?' Rather Than 'What If?'Even if you've hit your magic number for retirement, it's hard to stop worrying about money. Giving it a clear purpose is one way to reduce financial anxiety.
-
Three Estate Planning Documents a Business Owner Can't Afford to SkipA business owner's estate plan should protect the company and its employees as well as the entrepreneur's heirs. These three documents are critical.
-
Financial Fact vs Fiction: Why Your 'Magic Number' Isn't Actually MagicalDo you think you're diversified if you're invested in the S&P 500 and Nasdaq? Do you think your tax rate will fall in retirement? Think again — and read on for other myths that could be leading you astray.
-
Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful BillThe law makes opportunity zones permanent, creates enhanced tax benefits for rural investments and opens up new strategies for investors to combine community development with significant tax advantages.
-
Five Ways Retirees Can Keep Perspective Through Market JittersMarket volatility is a recurring event with historical precedents (the dot-com bubble, global financial crisis and pandemic), each followed by recovery. Here's how people who are near or in retirement can navigate economic uncertainty.
-
I'm a Financial Strategist: This Is the Investment Trap That Keeps Smart Investors on the SidelinesForget FOMO. FOGI — Fear of Getting In — is the feeling you need to learn how to manage so you don't miss out on future investment gains.
-
Can You Be a Good Parent to an Only Child When You're Also a Business Owner?Author and social psychologist Susan Newman offers advice to business-owner parents on how to raise a well-adjusted single child by avoiding overcompensation and encouraging chores.
-
How Advisers Can Steer Their Clients Through Market Volatility (and Strengthen Their Relationships)Financial advisers need to be strategic when they communicate with clients during market volatility. The goal is to not only reassure them but to also help them avoid rash decisions, deepen your relationship with them and build lasting trust.
