Spending Habits in Retirement

Written By: Kevin Reardon, CFP®

A frequent question we receive from retired clients is whether their spending is on track relative to the ‘average retiree’. The challenge with any summation is half the population is above average and half are below. More important than where your spending habits are relative to others is whether those habits are sustainable. In addition, knowing what boundaries to live within can be liberating and allows you to spend your desired budget with confidence. So, what considerations should retirees look at when evaluating their spending? Let’s dig in:

Spending Rule of Thumb

It’s not uncommon to read articles indicating people will spend only 70% in retirement relative to what they used to when they were working. There are some flaws in this statistic. Most of these articles assume your mortgage is magically paid off on the day you retire, immediately reducing your expenses in retirement. If you still have a mortgage, you need to account for that expense so the noted 30% discount isn’t realistic. If you did not have a mortgage prior to retirement, you shouldn’t have to discount your spending once you retire.

Spending Reality Check

If you retire on a Friday, your expenses on Saturday aren’t typically any different. You could argue you won’t have commuting expenses, dry cleaning and other miscellaneous expenses incurred from your career, but those expenses are quickly replaced with a honey-do project, bucket list trip, purchasing a new wardrobe, or (if you’re me) simply a trip to Cabelas.

Phases of Retirement

Not only is there no ‘one size fits all’ answer to how much you can spend in retirement, but it also varies based on your age. There are three well-known phases of retirement, and each comes with their own spending parameters.

Go-Go Phase: This first phase begins at retirement and lasts typically 10 to 15 years. It’s during these active years people spend extra money on travel, newer cars, deferred home maintenance and upgrades, and other bucket list wants. It’s common for people to spend 100%+ of their pre-retirement budget enjoying the early years. Although spending 110% of your pre-retirement budget can be sustainable for several years, assuming your pre-retirement budget was appropriate, spending 150% is usually not sustainable. Many people will justify high excessive spending (125%+ of budget) by stating these are one-time purchases that temporarily push them over budget. If high spending persists for more than two years, this indicates a lifestyle shift that will negatively impact your financial plan and is generally not sustainable.

As a guidepost, aiming to spend 100% of your pre-retirement living expenses is a good goal. Of course, this assumes you have saved properly throughout your lifetime. If you exceed that for a few years by a modest amount, client financial plans typically remain intact.

Slow-Go Phase: This phase occurs as you age and your body begins to slow down. As clients age we find they aren’t traveling as far, or as frequently. In addition, people do not purchase new cars as often and their home remodel projects were typically completed years ago. From our experience, this phase happens around age 80, give or take a few years based on the health of each spouse. It’s not uncommon to see a 10%–30% reduction in spending in the Slow-Go Phase relative to the Go-Go Phase.

No-Go Phase: This final phase occurs when there is a breakdown in health and mobility for at least one spouse. In this instance, healthcare expenses can rise dramatically. There can be larger medical expenses not covered by Medicare, including certain prescriptions, medical equipment and alterations to your home (stairlifts, ramps, elevators, grab bars, wheelchair accessible showers, certain scooters, etc.), and custodial care (nursing home, assisted living, home care, etc.). Nursing home or assisted living expenses can quickly exceed $10,000/month so it’s easy to see how someone’s budget and spending habits can change dramatically during this phase. The No-Go Phase can see a budget of 130% or more of the pre-retirement budget, which is why you want to be careful to not overspend during the Go-Go and Slow-Go Phases.

Widow’s Budget

For those who are widowed, your budget will be modestly less than a married couple in the various stages. Although expenses will decrease for someone who is widowed because there is only one of you, keep in mind you will see a decline in income with the elimination of one Social Security check and possibly any pensions. In addition, some expenses for widowers actually go up if you need assistance maintaining a home and doing domestic chores your spouse otherwise had done. The main drop in expenses typically occurs with discretionary expenses such as travel, car purchases and entertainment.  Someone who is recently widowed can expect to see their budget decline 10% – 30%, relative to when their spouse was alive and healthy.

Spending Disposition

Every person has a unique disposition for spending and consumption. Some retirees will end up spending a fraction of their income, and some will spend well over a sustainable amount. Both scenarios aren’t necessarily healthy habits, although we would favor the former to the latter (see next section).

A Word of Caution: Throughout the course of your working life, if you overspent in a given month or even a given year, you had time to dig yourself out of a financial hole. In retirement, it may not seem as evident that you’re overspending if you haven’t quantified your budget. In almost every instance of overspending, people inherently know when they aren’t acting prudently. Surround yourself with trusted professionals and listen to your loved ones if you start hearing anyone express concern.

Everyone’s situation is unique. The beauty of working with a financial advisor like Shakespeare is we can evaluate and stress test various spending scenarios. If you want to spend 10%-20% more for a period of time, we can illustrate the net-impact to your plan. In addition, we can identify hidden expenses you may not have considered so you can better prepare for them.

We are here to help our clients make the best out of their golden years and provide peace of mind if questions or lifestyle changes arise. If you would like a review of your retirement plan in lieu of current or future spending patterns, please call your Shakespeare advisor.