Three Phases of Retirement: How Your Spending Changes


Planning your retirement spending can be a bit of a guessing game. While the old retirement planning rule-of-thumb was to assume that our post-retirement expenses will be 80% of our pre-retirement expenses, in reality, there are three phases of retirement where spending can vary. Understanding these three phases can help us make better retirement planning decisions.

The phases of retirement were first articulated by Michael Stein in his book, The Prosperous Retirement. They are:

  1. The Go-Go Years,
  2. The Slow-Go Years, and
  3. The No-Go Years.

Let’s examine each phase and discuss how they potentially affect retirement spending.

Phase 1: The Go-Go Years

Comprising of approximately the first ten years of retirement, the Go-Go Years see relatively high retirement spending. This makes complete sense, of course. Most people tend to be younger, healthier, and more active during this phase of retirement. Spending would naturally increase as people start to enjoy travel, hobbies, and other interests that they didn’t have time to experience while they were working.

It is interesting to note that the Go-Go Years run concurrently with the most vulnerable investing period for a retiree’s portfolio. The first ten years of investment returns can affect future portfolio withdrawals. This is known as sequence risk; the sequence of your actual returns (rather than their average) matter in a real-world retirement scenario.

During retirement planning, we can expect spending during the Go-Go Years to be similar to pre-retirement expenses, if not slightly higher. This is completely normal. It’s important to pursue those experiences you want while you’re still young and active enough to enjoy them.

While the Go-Go Years may start with an increase in living expenses for some retirees, they tend to decrease by about 1% per year over this phase of retirement.

Phase 2: The Slow-Go Years

In the second phase of retirement, people often begin slowing down after all the activity of the Go-Go Years. There’s typically less time spent traveling and exploring new hobbies. Retirees tend to settle into a retirement routine during the Slow-Go Years. At this point, they have retirement figured out.

Not surprisingly, this decrease in activity during the Slow-Go Years will result in a reduction of retirement expenditures. While retirees in the Slow-Go Years haven’t completely turned into couch potatoes, they don’t attack retirement with the gusto they did in years prior.

All in all, leisure activity expenses tend to taper during the Slow-Go Years while general living expenses, taxes, and healthcare expenses may decline only slightly. Retirement living expenses continue to decrease by about 2% per year during the Slow-Go Years.

Phase 3: The No-Go Years

During the final phase of retirement, healthcare expenses become the focus of someone’s retirement expenses. People tend to slow down even more during the No-Go Years, which typically begin between the late 70s or early 80s.

During this time, healthcare costs naturally begin to rise. Even if someone is healthy enough to live independently, doctor’s visits and prescription drug costs typically become a factor. Assisted living facilities, in-home nursing care, and long-term care facilities can also cause expenses to climb.

Since healthcare and senior assistance costs have been increasing at a rate higher than general inflation, it’s easy to see how the No-Go Years involve an increase in retirement expenditures. While the costs of living rise during this phase, in most cases they tend to stay below pre-retirement expenses when adjusted for inflation.

How Your Spending Changes in Retirement

For retirement planning, using the old income replacement ratio of 80% doesn’t capture the nuance of how retirees actually spend money. In fact, this may drastically underestimate someone’s true income needs. Understanding the three phases of retirement can allow us to plan with more confidence.

If we plot this spending over time, it resembles a “U” shape, as you can see in the following graph. The shape of this graph is often called the “retirement spending smile” and is based upon research done by David Blanchett of Morningstar. Note that this spending is adjusted for inflation.

Change in Retirement Expenses

Knowing that spending changes over the three phases of retirement, what is the best way to factor this into your financial planning?

Based on my experience, I believe in using 100% of your pre-retirement living expenses for retirement planning. As you can see from the Morningstar study, while your expenses do decrease in retirement, they remain relatively close in real terms – once they’re adjusted for inflation. Any realized decrease in your living expenses will give you some margin for error in your retirement calculations and Monte Carlo analyses.

One encouraging aspect of the changes in spending during the three phases of retirement is that healthcare and eldercare expenses, based upon the data in this and subsequent studies, do not drive costs through the roof later in life.

While these late-in-life costs weigh heavy on many people’s minds, it seems that they may not be as burdensome as we believe.

If you need help figuring planning your spending during the three phases of retirement, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation. We often mention books and other products that we feel might find helpful. Wherever possible we use referral links; if you click one of the links in this video or description and make a purchase we may receive a small commission or other compensation. We participate in the Amazon Services LLC Associates Program, an affiliate advertising program designed to allow us to earn fees by linking to and related sites.
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