Certified Financial Planner Roger Whitney captures the usual story of the three stages of retirement clearly:
“In the ‘go go’ years of retirement, your spending may be at its peak. This is the time for travel, activities, adventures and family.This sounds so logical that it’s easy to accept the advice to spend a lot in your early retirement years. But let’s analyze this a little further.
In the ‘slow go’ years, your spending may slow as you become more settled.
In the ‘no go’ years, you may spend even less as you settle in even more.”
Let’s call these stages, the 60s, 70s, and 80s. Will you really want to start cutting spending when you’re only 70? It’s true that, on average, people do begin to spend less when they’re this young, but why? I can understand being less adventurous at 85, but why only 70?
Let’s try a completely different story to explain the drop in spending:
In the ‘dumb-dumb’ early years of retirement, people see their big pots of savings and spend too much. Even if they try to stick to a reasonable spending level, they tend to dip into principal for larger items like fixing a roof, replacing a car, or helping an adult child.Obviously, this narrative doesn’t apply to everyone, but it does apply to many, which skews all the spending statistics. If spending less were a common choice, then planning for it would make sense. But if it’s forced on retirees because of overspending, then it makes no sense to bake it into your plans.
In the ‘uh-oh’ years, people realize they’re spending too fast and begin to cut back.
In the ‘oh well’ years, there is little money left and people live on their government benefits and any pension streams they may have.
The next time someone tells you to be like everyone else and plan for peak spending in early retirement, what you should hear is that most other people spend themselves poor in early retirement, so you should too.