Depending on when you retire and how long you live, your retirement could potentially last for 3 decades or more.
However, most retirements can be broken into three stages, each of which is typically 5-10 years in length.
Furthermore, each stage has its own spending characteristics.
Understanding these stages can help you feel more comfortable in knowing what your spending in retirement may look like.
The three stages of retirement and their typical spending patterns are:
1. The “Active” years
During these early years of retirement, individuals typically enjoy robust physical and mental well-being.
This leads to an active lifestyle filled with travel, hobbies, leisure activities, and quality time with family.
As a result, there is often a notable increase in discretionary spending during this phase.
2. The “Less Active” years
During this middle stage of retirement, physical health is still generally good but frequent or strenuous activity starts to wane.
While mental acuity can still be sharp, it’s not uncommon for cognitive decline to begin during this period.
Extended or physically demanding travel becomes less common.
Highly physical hobbies and activities may no longer be feasible or enjoyable.
Instead, individuals tend to allocate their time predominantly to lower-key pursuits such as indoor activities and social gatherings.
As a result, discretionary spending usually declines, with limited significant increases in other expenses.
3. The “Not Very Active” years
Engagement in activities outside of the house becomes limited during this stage as physical and/or mental health issues become more prevalent.
In addition, there might be a need for full-time living assistance or medical support.
Discretionary spending is often minimal, prioritising essential needs, while medical expenses experience a significant increase as healthcare requirements become more prevalent.
What does this mean for your retirement?
It is common for total spending to decline over the course of retirement.
Discretionary spending is highest during the initial “go-go” years but often decreases significantly as retirement progresses.
However, it’s important to note that medical expenses are likely to increase over time, especially if you retire to a country that does not have a robust state health system.
Additionally, it’s crucial to recognize that the duration of each retirement phase may vary from the typical 5-10 years, and some phases may be skipped altogether depending on individual circumstances.
Understanding how your spending needs may evolve throughout retirement can help alleviate concerns and uncertainties regarding how your retirement funds will last.
Having a well-crafted retirement plan in place allows you to allocate funds for travel, experiences, and other enjoyable activities during the active earlier years.
However, a comprehensive retirement plan should also account for potential expenses during your “Not Very Active” years, as significant medical issues may arise.
By being prepared and having a sound financial strategy, you can confidently navigate the different phases of retirement, allowing yourself the freedom to enjoy life while also addressing potential healthcare needs.
