Do you behave the same way you did 20 years ago? Are your spending habits the same? What about your saving behavior and income?
If the absurdity of those questions made you laugh, you’re like a lot of Americans whose financial habits have evolved over time. The same goes for your retirement years. Although you have probably calculated the value of your nest egg in terms of annual retirement income, what you will be spending immediately after leaving the working world will likely be very different as you move further into retirement.
The average retiree can expect three phases of retirement: early retirement – a period of travel, hobbies and adventure; middle retirement – a stage marked by socializing, activity and relaxation; and later retirement – a time of winding down, when most of your days are spent at home.
It’s logical to assume the costs of retirement will vary among phases. Spending habits at age 50 are definitely not the same as they were at 25. Likewise, your spending at age 85 will look different than age 65. Therefore, a retirement plan that includes specific “buckets” of money for each phase allows for more flexibility and helps ensure you won’t outlive your nest egg.
Let’s dig a little deeper into those stages and look at how costs can fluctuate:
Phase 1: Early retirement.
Your mind and body are sharp and you’re beyond excited to embark on new adventures. As a result, you may find this to be the most expensive phase of retirement. However, you’ll have to balance these increased costs to ensure you don’t blow through your savings in the first 10 years. Careful advance planning means you’re more likely to enjoy everything you want in your early retirement years while also safeguarding your future retirement income.
In this phase, be sure to adjust your budget for increased spending in these areas:
• hobbies (gardening, a new art class or membership at that golf course you have your eye on)
• grandchildren’s education costs
• assisting adult children in need
These higher expenses can be balanced against potentially lower costs in other categories, such as:
• reduced driving (car, gas and other transit expenses)
• less need for a professional wardrobe
• no more automatic contributions to your retirement accounts (which could be up to 15 percent of your income if you were on target with your savings rate)