As your life changes over the course of a multi-decade retirement, your interests and priorities will too. A packed schedule may give way to a more relaxed pace of life that keeps you closer to home. Activities that keep you stimulated mentally may take priority over those that challenge you physically. And a whirlwind of social engagements may be replaced by fewer, deeper, relationships.
Through the years, your spending patterns will likely adapt to those shifts, explains Fidelity wealth planner Julie Ramos. “Research has found that for some people, retirement spending is a curve and not a straight line,” Ramos says. “That’s why it’s so important to have a flexible plan that can adjust as your needs and lifestyle change over time. I find that understanding my clients' pattern can help them feel more confident about their retirement plan, because they know what to expect and can prepare for shifts in spending.”
Below are some strategies that can help with that preparation.
Stage 1: The Go-Go Years
The first phase of retirement, sometimes dubbed the “go-go years,” is often exciting and busy, with time to devote to leisure activities and personal goals you may have had to put off while working. You may be juggling a vibrant social life with time with grandkids and family, extended travel, and more. “Expenses could potentially go up during this phase,” says Ramos. However, it's still important to invest for future health care and spending needs.
Consider sources of reliable income. Your retirement paycheck may include a combination of Social Security benefits, pensions, and annuity payments, as well as withdrawals from IRAs, 401(k)s, and personal investment accounts. Having your essential expenses—like housing and health care—covered with reliable income sources, such as Social Security benefits, pensions, and annuity payments, can help alleviate the stress of potential market volatility, says Ramos. “When your essential expenses are covered with predictable income, you can cut back on the ‘nice to have’ stuff, but you don’t need to cut back on the ‘have to have’ stuff, if your investments have a rough patch,” she explains. You may want to consider using a portion of your savings to purchase a lifetime income annuity, which could help shield some of your income from market volatility.
Set a leisure spending budget. A sustainable spending plan should set a withdrawal strategy that protects future assets, while also allowing you to fully enjoy leisure activities that are important to you. While you don’t want to risk depleting your savings, you also shouldn’t underspend out of fear. Your leisure budget should truly reflect expenses that are important to you and take into account help you may want to provide to children or grandchildren, as well as any legacy you wish to leave. You may want to work with financial professional to create a long-term plan that can help give you the confidence to spend assets today.
Invest for growth potential. It's important to consider a mix of stocks, bonds, and cash that is appropriate for your situation to fund discretionary spending and to help keep pace with inflation, balancing risk and reward. An overly conservative strategy can result in missing out on the long-term growth potential of stocks, but you need to take into account your risk tolerance to ensure you don’t get anxious in the face of market volatility. Market growth and smart investment strategies can help to potentially mitigate the risk of your savings shrinking each year, suggests Ramos.
Manage future long-term care costs. Long-term care generally isn’t covered by Medicare, and health care is often one of the largest expenses retirees face in later years. Plan ahead for how you might cover long-term care, whether through personal savings, government benefits, insurance, or other means. If you’re considering long-term care insurance, you may want to look at a hybrid product, which combines long-term care coverage with life insurance or annuities and potentially allows for a life insurance death benefit to beneficiaries.
Stage 2: The Slow-Go Years
By your mid-70s to early 80s, you may find that your energy levels are lower, travel is less frequent, and you find fulfillment staying closer to home and family. This is the slow-go phase, where lifestyles begin to shift, and so do financial priorities.
Plan for RMDs. Under current law, you must begin taking required minimum distributions (RMDs) from your tax-deferred retirement accounts the year your turn 73 (the age is scheduled to rise to 75 for those who turn 74 after December 31, 2032). You'll likely need to pay taxes on these withdrawals. If you don’t need your RMDs to meet your basic living expenses, you may want to consider strategies to reinvest or gift the funds. The additional income from your RMDs can push you into a higher tax bracket, so you may want to investigate opportunities to reduce the tax consequences.
Evaluate your housing options. While many retirees hope to stay put indefinitely, others look to relocate or downsize to save on taxes, tap home equity, or move closer to their support system. If you decide to stay put, consider how you might finance renovations that allow for aging in place, such as adding a bedroom suite on the ground floor or widening the hallway for a walker.
Consider lifetime gifting. Passing on wealth during your lifetime gives you the chance to see your children or heirs enjoying their inheritances and can also potentially reduce your estate tax liability at death. Depending on your goals and whether you are concerned with future federal or state estate taxes, you may wish to gift cash, appreciated assets, such as stock or real estate, or interest in a family vacation home or business.
Stage 3: The No-Go Years
In the later years of retirement, you are likely to experience greater medical needs and seek more support from others. In this stage, you may be seeking a middle ground between planning for your own financial well-being and creating something meaningful to pass on.
Have a plan to cover new health care expenses. Medical expenses, home health aides, assisted living, or nursing home care can create significant costs as you age. Make sure you have a plan for quick access to cash to cover unexpected expenses without having to sell assets, such as borrowing against the value of your securities.
Ensure your documents are up to date. “I encourage my clients to start talking with their loved ones about their health care preferences and wishes while they're still healthy and sharp,” says Ramos. “Ask yourself questions like: What kind of care would I want if I needed help? Who would I trust to make decisions on my behalf? What are my values around aging and end-of-life care?” Review your estate plan to ensure that your wills, trusts, powers of attorney, and health care directives are up to date and aligned with your wishes.
Pass on money values. The most impactful estate plans go beyond documents that transfer financial assets—they explain what the grantors want the money to represent and the impact they want it to have on the next generation. Consider arranging a family meeting to discuss your plans, possibly including a financial professional or attorney as a neutral third party. You may also want to consider writing a side letter, which is a letter to the trustee of your trust, or executor of your will, that provides additional context and guidelines to help them make decisions.
Stay flexible
Planning for retirement doesn’t end the day you retire—it’s simply a step in a process that lasts as long as you do. “Retirement isn’t about giving things up, it’s about finding the right balance,” says Ramos. “Ultimately, our goal is to help you create a roadmap that lets you enjoy retirement with peace of mind, knowing you’re prepared for both the expected and the unexpected, and has the flexibility to adapt as you experience life changes.”