Many retirement savers rely on a mental shortcut to determine how much to sock away: They multiply a figure that’s a little lower than their current annual budget by the expected length of their retirement. It’s not a bad way to get started—but the truth is that retirement income needs typically change over the course of one’s lifetime. Understanding that process can be essential to securing a comfortable and fulfilling retirement.
A U-Shaped Curve
Spending patterns typically form a U-shaped curve over the course of retirement, reflecting shifts in lifestyle, priorities and healthcare needs. Spending often surges soon after retirement due to travel, hobbies and activities that were likely postponed due to work and life demands. As this flurry of activity slows during mid-retirement, spending declines. Later in life, it typically rises again due to increasing healthcare costs.
The Mindset Shift
Psychological factors may also play a role in retirement spending, with the shift from earning to drawing down finite savings making retirees more price-conscious. In some cases, caution about spending turns to underspending—living an unnecessarily frugal life—and it’s a risk that your wealth advisor should monitor with careful precision, ensuring you have a well-crafted withdrawal strategy. After all, living a comfortable life in retirement is the whole point of decades of careful saving and investing.
Retirement Income Planning
Your wealth advisor uses their knowledge of retirement spending patterns as they create your personalized retirement income plan. They’ll also incorporate your unique goals, time horizon, risk tolerance and other factors. This process will likely include a careful analysis of your current living costs, anticipated healthcare needs, travel plans and expected hobbies. It will generally incorporate expected inflation and model various investment-market scenarios. A comprehensive evaluation of all these factors allows for the creation of a stage-specific spending plan, which helps ensure the ability to handle fluctuating costs and mitigates the possibility that you’ll run out of money.
Your advisor can help you develop a withdrawal strategy that aligns with your expected spending needs in each stage of retirement. This includes timing withdrawals from various accounts, such as tax-advantaged accounts like 401(k)s and IRAs, taxable investment accounts, and Social Security, to match your spending curve while optimizing tax efficiency and the growth of your longer-term assets. Your advisor will also intentionally plan for the unexpected, helping to ensure that a portion of your portfolio is designed to withstand market volatility. This approach also can help ensure you won’t need to sell longer-term holdings at a loss during market downturns.
Remaining Vigilant
Your wealth advisor can review your plan regularly to make sure you’re on track and make any necessary adjustments for new changes in lifestyle, health, market conditions or personal goals. Don’t hesitate to reach out to your advisor with any questions about how to prepare for a confident and fulfilling retirement.
This material is provided for informational and educational purposes only. It does not consider any individual or personal financial, legal, or tax circumstances. As such, the information contained herein is not intended and should not be construed as individualized advice or recommendation of any kind. Where specific advice is necessary or appropriate, individuals should contact their professional tax, legal, and investment advisors or other professionals regarding their circumstances and needs.
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