The standard thinking on retirement budgeting over the past couple of decades followed two rules of thumb or shortcuts:

Shortcut 1 – Peg your anticipated expenses to a percentage of your pre-retirement income, such as 75% or 80%.

Shortcut 2 – Withdraw no more than the 4% annually—the so-called “safe withdrawal rate”—and then adjust going forward based on the rate of inflation.

The new thinking updates those shortcuts with two themes:

Theme 1 – We tend to go through three phases of retirement: early, middle and late.

Theme 2 – Everyone’s situation is different and evolves over time, so we all need a more tailored approach, with regular monitoring and adjustment.

Three Retirement Phases

Let’s look at how much money you might need in retirement based on broad age-related lifestyle changes.

  1. The Early Phase – Typically ages 60–70 or 65–75
    If you retire in your early or middle 60s, you’ll likely be in good health, have plenty of energy and a desire to be active: travel, golf and various hobbies are common pursuits, and they all cost money. Early in retirement, your overall expenses might not change that much from your workdays. Once you no longer work, you might spend less on clothing as well as daily auto-related or transit expenses, but you could make up the difference with expenses related to hobbies, entertainment and travel. If you downsize your home, become mortgage-free and no longer save retirement, your overall spending may be less than it was during your pre-retirement years. The net impact will depend on your specific situation.
  2. The Middle Phase – Typically ages 70–80 or 75–85
    In the middle phase of retirement, people typically slow down. You may still travel, but it might be less extensive or less frequent. Snowbirds often make a winter sojourn, but settle into a fairly stable home-based routine. For some, declining health may be a factor. You might downsize your home or make it easier to navigate. Perhaps you’ll purchase a single-level house or condo. Your weekly activities might become more predictable and routine. With the onset of late-life health issues not yet affecting you, this might be a phase when you spend the least.
  3. The Late Phase – Typically age 85+
    In the final phase of retirement, you will likely slow down further. Mental, physical or financial limitations might reduce or eliminate your travel as well as other activities. You might find yourself spending more time at home and in doctors' offices. In your final years, there’s a chance you could be in a long-term care facility or a seniors’ community or residence. Your overall expenses could increase, as higher medical expenses offset smaller expenditures in other areas of life.

Spending commonly follows a "U" curve during the three phases of retirement. After declining in the middle period because you're less active, your overall expenses might rise again late in life as your health care needs increase.

No Two Paths Are the Same

These are generalizations, as no two paths are identical. In all cases, your health and family history of longevity will be important considerations in planning. However, the takeaway is that you shouldn’t expect your retirement lifestyle or expenses to be static throughout your golden years.

Assessing your actual expenses throughout retirement is critical to budgeting.
If you find yourself spending too much, with regular monitoring you’ll be able to pinpoint your discretionary expenses and cut back as needed. Keep in mind that it’s normal to spend more in your first decade of retirement, with your expenses easing in phase two, then increasing again in phase three.

Also, it's critical to carefully monitor your expenses and nest egg in your first few years of retirement to make sure you start off on solid footing so your money can last for the rest of your life.

Learn more about Retirement Planning