Many people assume that their spending will decrease dramatically once they retire, but research shows that, for most retirees in the UK, spending actually tends to rise in the early years of retirement. Let’s take a closer look at why this is often the case and how you can plan accordingly.
Spending Patterns in Retirement
There’s a term often used in retirement planning called the “retirement smile,” which represents the typical pattern of spending over time in retirement. It’s called a smile because, for most retirees, spending initially increases, then decreases as they age.
From ages 65 to 70, many retirees are in good health, have more free time, and are eager to enjoy their newfound freedom. This is when most people take those long-awaited vacations, dine out more frequently, and spend money on activities that they didn’t have time for while working. During this period, many find their spending habits actually increase as they embrace a more leisurely and adventurous lifestyle.
The Active Years of Retirement
The assumption that retirement equals a slow, sedentary lifestyle is far from accurate. In fact, the first 5 to 10 years of retirement are often quite active. People tend to enjoy a lot of new experiences and activities that require funding. It’s only when retirees reach their mid-70s that their expenses start to decline, often as they transition to a quieter, less expensive phase of life—what some might call the “book reading phase.”
However, the “vegetable” phase of retirement, where spending dramatically drops, doesn’t usually hit until around age 85. At this point, spending often spikes again due to the rising costs of healthcare and social care.
Planning for the Life You Want
Retirement is a highly individual experience. What works for one person may not work for another. However, one thing is certain: retirement should be a time to enjoy life to the fullest, pursuing the activities and hobbies you’ve always wanted to explore. It’s your “life 2,” and it’s essential to plan for it accordingly, ensuring you have enough financial resources to live freely and comfortably.
It’s surprising how many people, despite knowing they’re entering a time without work-related income, plan to cut their spending drastically. For example, many retirees expect their income to halve or even be reduced by more. While your mortgage may be paid off by the time you retire, it’s crucial to plan for increased spending in those early years, not less.
Two Key Takeaways
- Plan for Increased Spending in Early Retirement
When calculating how much money you’ll need in retirement, assume that your spending may actually increase in the early years. Planning for a drastic income reduction early on isn’t realistic for most people. - Stay Flexible
Retirement isn’t a “set it and forget it” phase. You need to remain flexible and regularly review your plans to adapt to changes in your lifestyle and financial needs. Retirement spending patterns don’t simply decline in a straight line; they fluctuate based on health, activities, and unexpected events.
Time for a Rethink?
If you’ve been assuming that your spending will decrease significantly once you retire, it might be time to reconsider. Retirement planning requires more than just preparing for a drop in income; it’s about creating a financial plan that supports a fulfilling and enjoyable retirement life.
