Spending in Retirement

For retirement planning purposes, many clients and even advisors assume a specific level of expenses, such as $7,000/m, that needs to be maintained throughout your golden years. To keep the projections safe and conservative, some will include a certain "cushion” such as 10% over the projected budget. To analyze your spending plan even further, many advisors, including CSF, recommend segregating your expenses into “fixed” and “discretionary” buckets. This approach helps with evaluating the feasibility of your plan under different market conditions.

In practice, it is very unlikely that your retirement expenses will remain flat throughout your entire retirement period. In fact, the variability can be dramatically different depending on your retirement stage and needs to be properly incorporated into your overall retirement plan.

The first 10 years of your retirement are usually your “Go-Go" years. This is when people begin to truly enjoy the fruits of their labor the most. Travel and other discretionary expenses tend to peak at this stage. It is not uncommon for your discretionary expenses in this period to be significantly larger than your regular living budget. Your retirement plan needs to include additional reserves to ensure these additional expenses have a limited impact on your portfolio, specifically in times of market volatility.

The next 10 years can usually be described as “Slow-Go” years. Even those who remain in good health tend to slow down on their travel plans and mostly focus on local trips or family visits. At this stage, your discretionary expenses tend to decline, and many retirees begin to focus on other options such as gifts and charitable contributions. 

The remaining 10 years are frequently described as “No-Go" years. At this stage, mental and/or physical health tends to significantly degrade. People rarely travel outside of their local area. Their discretionary expenses are frequently redirected toward medical care and other related expenses. This, in turn, can result in significant tax deductions which are frequently not addressed in generic or software-generated retirement plans. Estate planning and gifting strategies are of particular importance for people in this stage of their retirement.

It is important to highlight that you should expect your spending to decline throughout your retirement years. Many individual investors and even advisors neglect to include this important point as part of their retirement plan design. The most likely result of such planning is unnecessarily underspending during your “Go-Go” years which results in lower retirement enjoyment.

The bottom line is that with proper planning you should be fine with spending more during the first several years of your retirement. This is when most people enjoy their golden years the most. Proper understanding of your personal spending pattern should also reduce the fear of running out of money. This is another reason why so many inadvertently underspend when they first retire.