By Kevin Reardon CFP®
You have worked your whole life, saved well, and are ready to retire. It’s important to know how much you can pull from your assets during retirement and not outlive your money. Let’s focus on the reality and tradeoffs that go with retirement spending planning.
If you are physically healthy and financially prepared, your retirement could last many decades. During that time, it may go through different phases that require different approaches to spending.
3 Phases of Retirement
We have recognized there are three phases of retirement spending.
- Go-Go Years: The early years of retirement are called the Go-Go Years of retirement because we are young, healthy and wanting to do all the things we were not able to do during our working years. This phase of retirement sees the highest amount of consumer and lifestyle spending. You may want to balance your travel and other activities with free or low cost ones (volunteer, spend time in nature, libraries).
- Slow-Go Years: As our body ages, we slow down. At this point we may have accomplished many of the things on our retirement ‘bucket list’ and are satisfied with our lot in life. With this physical slowdown comes a slowdown in spending.
- No-Go Years: When health problems develop, we may not have the energy or desire to venture out. During these later years, it is possible that your spouse has passed away. This stage of life typically sees a reduction in consumer and lifestyle spending, but an increase in healthcare costs.
Reality Spending – No Drunken Sailors
Do we need to keep track of our spending during the go-go years, when we are likely to spend the most? Of course! We do not have a free pass to spend at will during any point of our life. Spending must always be done in consideration of our overall financial plan, our life goals, and the necessity to plan for a lengthy retirement. We are happy to review your withdrawal rate relative to your assets to determine if you are within the safe zone, or if your spending has exceeded the safety guardrails. But the reality is we (i.e., you) do not really need to do this calculation.
A few simple questions we can ask to bring our spending in to reality:
- Are we spending in a similar fashion during the early years of retirement, relative to the last few years we were working? Most of our financial plans predict a spending rate during the go-go years similar to that of our pre-retirement years. This similar spending rate corresponds to an increase in lifestyle during retirement and a decrease in spending on work related expenses (gasoline, wardrobe, eating out, etc.). Your mortgage may be recently paid off, and your dream car purchased a few years ago is now paid off, etc. If your spending is more than 15% higher during the first few years of retirement, chances are you are overspending.
- Are you rationalizing spending decisions? The human mind has lots of tricks that ‘help us’ do things we should not. Just because we like the shiny Corvette or would be safer riding in the Cadillac Escalade does not mean we should make one of these purchases, much less both of them. If owning these vehicles was in-line with your lifestyle before retirement, then go for it. Otherwise, you are probably overspending. Of course, if there is a lifelong goal you been saving for, separate from your other financial assets, then a one-time lifestyle improvement purchase can make perfect sense within your overall financial plan.
- Do you use the word ‘really’ in front of a potential purchase decision? I really need a new _______. I really want a new _______. If you need or want something… then go buy it!! If you are using certain adjectives in front of your wants and needs, chances are these lifestyle purchases are outside the safe spending limits of your financial plan.
A key component with any decision relates to what else we could do with our money. More importantly, when it comes to financial planning, we need to address what else we might need the money for later.
When we are young and healthy it is hard to imagine the potential of paying for long term care needs in the future. The reality is that more than 70% of us will spend money to pay for long term care expenses before death, with more people paying for additional ‘aging’ expenses like wheelchairs, scooters, hearing aids, home monitoring devices, home improvement modifications so our homes are more senior accessible, etc. By the way, these long-term care needs do not always wait until you are in your late 90s to develop. Many people suffer debilitating illnesses, cognitive loss, or physical disabilities in their 60s and 70s.
If you have an adult child who needs medical care not covered by insurance, you may want to step forward to help pay for the best care possible. Helping a grandchild pay for college, a new car, or basic living needs is also something you might want to assist with.
It’s hard to get our heads around not spending the extra chunk of money today for a lifestyle improvement, so we can be better prepared to pay for necessity spending later. We have all seen parents, grandparents, aunts and uncles, etc. get older and ultimately need to pay for end-of-life expenses not on their bucket list. Imagine a scenario where you have this type of need, but not the means to pay for it. It’s like the fable of the ant (plan for the future) and the grasshopper (live for today), but in the context of real life with significant consequences.
We want everyone to live a fulfilled life and to pursue their dreams at every stage of the retirement lifecycle. These goals and dreams need to be pursued thoughtfully, balancing your desires of today with your needs of the future. To have an in-depth discussion about your retirement income plan, give us a call.