Retirement is often viewed as the golden phase of life, a time to enjoy the fruits of years of labor.

However, one crucial aspect that often surprises many retirees is the significant increase in spending that occurs after the age of 65.

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Retirees often face the challenge of balancing their spending: some underspend out of fear, potentially missing out on enriching life experiences, while others overspend early on, leading to financial stress in later years. Understanding the reasons behind these spending patterns is crucial for creating a sustainable and enjoyable retirement.

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As a Certified Financial Planner with over a decade of experience, I’ve helped thousands of retirees create safe spending plans that mitigate the uncertainties retirement can throw at them. Let's delve into why your retirement spending skyrockets after 65 and what you can do to manage it effectively.

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Understanding the Retirement Spending Pattern

One of the biggest misconceptions about retirement spending is viewing it linearly. Many people plan their retirement budget by estimating a fixed amount they will need each month, adjusting it only for inflation. However, real-life spending doesn’t follow such a straightforward path. Studies show that retirees’ spending follows a pattern often referred to as the “retirement spending smile.” This pattern consists of three distinct phases: the Go-Go years, the Slow-Go years, and the No-Go years.

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The Go-Go Years

The Go-Go years, which typically encompass the early years of retirement, are marked by increased spending. This surge is driven by the newfound freedom and enthusiasm to pursue hobbies, travel, and other activities that were previously limited by work commitments. Every day feels like Saturday, and retirees often indulge in remodeling their homes, taking vacations, and engaging in various leisure activities.

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For instance, retirees might find themselves pushing the Amazon button more frequently as they explore new hobbies. Celebratory vacations can become an annual or even more frequent occurrence. The enthusiasm to enjoy life to the fullest often leads to higher expenditures during this phase.

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There are generally two types of new retiree spenders: those who spend liberally and those who are super cautious. The liberal spenders risk exhausting their resources too quickly, while the cautious ones may end up with regrets for not experiencing more of what life has to offer. Finding a balance is crucial. One way to manage this is by planning for the extra spending during the Go-Go years, understanding that it’s just a phase, and enjoying it while keeping an eye on long-term financial stability.

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The Slow-Go Years

As retirees move past the initial excitement of retirement, they enter the Slow-Go years. This phase is characterized by a decrease in discretionary spending and a shift towards more essential expenditures. According to the Bureau of Labor Statistics, from the ages of 65 to 74, about 40% of a retiree’s budget is allocated to discretionary spending, which drops to about 34% for those aged 75 and older. The reduction in discretionary spending is often due to a decline in physical activity and social engagements.

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During the Slow-Go years, healthcare costs start to rise, gradually taking up a larger portion of the budget. Food and transportation expenses also tend to increase. For example, the average annual spending on food has increased from $5,059 in 2012 to $7,306 in 2022, while transportation costs have risen from $6,358 to $8,172 over the same period.

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The No-Go Years

The No-Go years, typically starting around age 75, see a further shift in spending priorities. During this phase, healthcare costs become the dominant expense. Retirees may need to allocate funds for home modifications, assisted living, and other healthcare-related needs. It’s essential to plan for these costs early on, as Medicare does not cover custodial care, which includes assistance with daily living activities.

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One major challenge in planning for the No-Go years is the uncertainty surrounding future healthcare needs and costs. Despite the difficulty in predicting these expenses, it’s crucial not to ignore them. Understanding your options and having a plan in place can significantly alleviate the financial stress during this phase of life.

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Essential Spending vs. Discretionary Spending

Distinguishing between essential and discretionary spending is a vital exercise for near-retirees. Essential spending includes housing, food, healthcare, and other necessities, while discretionary spending covers vacations, hobbies, and other non-essential activities. A 2018 study by the Bureau of Labor Statistics confirms that retirees shift a higher percentage of their total annual spending towards essential budget items as they age.

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From ages 65 to 74, discretionary spending accounts for about 40% of the budget, which decreases to 34% for those aged 75 and older. This shift is primarily due to the increasing healthcare needs and costs associated with aging.

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Planning for Retirement Spending

Understanding the different phases of retirement spending is crucial for effective financial planning. Here are some strategies to help manage your retirement budget:

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Replacement Ratio: This method involves estimating your retirement budget as a percentage of your current income. For lower-income individuals, the replacement ratio can be higher, while for higher-income individuals, it’s lower. For instance, Fidelity suggests using 80% for those earning less than $50,000 per year, 70% for those earning between $80,000 and $120,000, and 55-65% for those earning more than $120,000.

Detailed Budgeting: A more precise method involves listing your current spending and adjusting each category based on your retirement plans. This approach helps in itemizing expenses and making informed decisions about discretionary spending.

Plan for Big Purchases: Identify any significant expenses you might incur in the first few years of retirement, such as home renovations or purchasing recreational equipment. Set aside a separate fund for these one-time costs to avoid impacting your annual budget.

Consider Healthcare Costs: Prepare for the increasing healthcare expenses in the No-Go years. Understand what Medicare covers and explore additional insurance options to ensure you have adequate coverage.

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Conclusion

Retirement spending is not a linear process. It follows a pattern influenced by lifestyle changes, healthcare needs, and other factors. By understanding the different phases of retirement spending and planning accordingly, you can enjoy a financially secure and fulfilling retirement. If you need personalized advice and a comprehensive retirement plan, consider booking a no-cost consultation with our team of professionals. We are here to help you navigate the complexities of retirement planning and ensure a stress-free and enjoyable retirement.

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Click here to watch the full Youtube video that provides a full rundown of this topic!

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