Retirement Life
23 August 2022

Expenditure patterns in retirement

An old financial planning benchmark assumes that in retirement you will spend 75 percent of the amount you spent while you were still working. The assumption is based on the idea that it costs less to live in retirement; when you are retired, apparently, you spend less on things like clothing, transport, food, utilities etc.


Apparently, but don’t bet on it, I would be very careful with such assumptions. In fact, my experience is that retirees in the early years of retirement see their expenditures actually rise rather than fall. A blind expectation that expenditure will drop significantly at the very start of retirement is very dangerous.


This is important: you do not want to run out of money and spend your last years of retirement in poverty, but nor do you want to look back and see that you could have lived better. Trying to figure out the right amount of income and expenditure is difficult but critical for a good retirement.


Some studies have shown that people tend to underspend early on in retirement. While our deepest retirement fear is that the money runs out before we do, it is common to take too little from our savings and forgo lifestyle early in retirement when we really could have lived it up a bit more. It seems to me that leaving lifestyle on the table is more tragic than doing it hard in our waning years!

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Most people are still reasonably fit and active when they retire. Moreover, now that they no longer have the impediment of work, they have the time to do things; time to shop, time for leisure activities, time for sports, travel, socialising, and entertaining grandchildren. All of these things cost, but chances are that you will do less of them as you move further into retirement.


In fact, I do not think it especially useful to think of retirement as one stage of life. Instead, it is best to think of retirement as three stages, each with its own characteristics and (crucially) expenditure levels.


Retirement is for a long time: a 65-year-old woman will have a life expectancy of nearly 90 – that is 25 years in retirement. Over that time, you will change. Think of another 25-year period of your life, say from age 30 through to age 55: you were quite different as a 55-year-old compared to your 30-year-old self. You lived differently, you did different things, your work was different, and your expenditure was different.


So it is in retirement: 25 years on from the start of retirement, the things you do and the way you live will change – and with that change will come changes to your expenditure patterns.


Rather than just one stage, it is better to see retirement as three stages:

Martin Hawes

Martin Hawes

All go

This stage probably lasts around ten to fifteen years for most people and, as the name suggests, it will be a time when you do lots of things and spend money. For some, this may be an expensive time!

Slow go

Inevitably and inexorably, as you age, your activity will begin to slow. As you become less active, your expenditure is likely to fall – you will travel less, eat less, drink less, drive less etc. As life slows, expenditure falls.

No go

In this stage, perhaps later in their eighties, people do less and venture out less. Expenditure can fall quite sharply, although healthcare costs may rise depending on your situation. In any event, there does come a time in life when you no longer can or want to spend like you used to.


All of this change makes matters difficult for those planning their retirements. Expenditure is unlikely to be a consistent, flat line over the 25 years of retirement. The amounts you draw from your savings and investments need to be planned accordingly – more at the start, less towards the end.


I think retirement planning calls for you to do mock expenditure budgets for the three stages. It is important that you try to imagine your life and how you will live during these stages and try to attach an amount of expenditure to each stage.


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Get some help to do the numbers but be sure to plan to spend more in those early years, being confident that expenditure will naturally fall as you age. It is perhaps an uncomfortable idea to draw out more money early on – it is more natural to horde money against adverse events.


However, if there was ever a time to live well, it is those early years of retirement – this is the time to relax, use your retirement savings for what they were intended and have the very best life you possibly can.

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Written by:

Martin Hawes

Martin Hawes is not a Financial Adviser or a Financial Advice Provider, and the views in this article are not intended to be financial advice. The views and opinions are general in nature, and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. Martin Hawes is a director and shareholder in Lifetime Income.

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