First, you’ll spend more, and then later, maybe, you’ll spend less. Being realistic about what lies ahead and how much it will cost will lead to a more enjoyable retirement.
People always ask “how much money will I need to retire,” but there’s no magic number. How much depends on what you want to do and how long you’ll live. Since you can’t know the second part of this question, it’s best to estimate costs for the first part.
A recent article in Kiplinger, “The 3 Spending Stages of Your Retirement,” advises you to plan for three distinct phases of retirement.
Phase One: Retirement Day to 75. This is the phase in which folks are very active, like playing a lot of golf, enjoying vacations and new hobbies. Some say that retirees’ cost of living will go down 40%, but that’s not always the case, if you’re involved in many activities or jetting across the globe. For many during this first phase of retirement, costs will go up. Plan on your cost-of-living to increase around 4% per year in Phase One. That rate may sound a bit aggressive, but it’s best to err on overestimating on costs and underestimating on income.
Phase Two: Between the ages of 75–85. Many retirees are still active in this phase, but they may begin to settle down some. While many people are still spending during this phase, the cost of living typically levels off. Plan on an increase of 3% per year to be conservative, again. Overestimating expenses in the planning process, can help make reality better than projections.
Phase Three: Age 85 and beyond. In the third phase of retirement, people usually spend more time at home and with their families. As a result, expenses decrease, provided there are no major health concerns. This is the time to consider the legacy you want to leave. You can even start transitioning some of your wealth to heirs. However, to be conservative, you should continue to build in a cost-of-living increase of 2% a year.
These are general categories, and vary a great deal from person to person. However, understanding these three phrases will give you a better idea of how you should be planning now. Want to travel the world in luxury during Phase One? Make sure there’s enough for Phases Two and Three.
Reference: Kiplinger (February 8, 2018) “The 3 Spending Stages of Your Retirement”