The Three Stages of Retirement Spending
When retirement planning, you may want to view your spending in three different phases.
Michael Stein, who wrote “The Prosperous Retirement”, divided retirement into three decades: the GO-GO years, SLOW-GO years, and the NO-GO years.
When discussing retirement income planning, Frank Jasek CPA, CA, and I rephrased those terms based on our experience and have named them the ATM Years.
ATM: Like a Bank ATM Machine
Once you stop working you need to withdraw money from your savings, like withdrawing money from an ATM machine.
ATM: Active Years, Transition Years, Maintenance Years
Each letter of ATM also stands for a specific period of spending in retirement.
These are your most active years that occur in the first 10-15 years of retirement when you are still healthy, younger, and are able to do the things you wish to do.
These could be your great adventures in retirement, doing the things that could take money and require being fit enough both physically and mentally to do it.
You will want to front-end load your spending while you are able to do the things you wish to do.
These are the years when you begin to transition and slow down, and your spending declines along with some of the activities you used to do. As an example, you may no longer wish to take longer overseas trips, but may continue to visit the southern US in the winter.
I have seen this typically occur from ages 75 to early/mid 80s depending on health.
These are the years you tend to stay close to home, with less activities. Often this is based on age and health. This is the period when you could see extra health care expenses for at home care, and/or a move into a retirement facility.
Life Span vs Health Span
The move from one stage to another really depends on your health span – that is, how long you are healthy mentally and physically.
When planning retirement income, the CFP® guidelines suggest CFP® Planning Professions should plan to age 96. The closer you can get your health span to your life span the happier you will be. This can come down to luck (avoiding heart attack, stroke, cancer, dementia), as well as doing what you can to keep mentally and physically fit.
When blueprinting your retirement, you may wish to allocate your spending based on the ATM years, and front-end load your expenses in your Active Years, knowing in all likelihood you may spend less as you age.
A good way to break down your projected retirement expenses is in the following categories:
- Day to Day Living Expenses: these would be your normal daily living expenses.
If you are working today, you would simply take off the expenses you would no longer have once you stop working, such as savings for retirement, mortgage, and debt payments.
Expenses for your children such as food, hockey, and education savings would also have to be deducted.
You would keep all day-to-day expenses required to live, such as auto expenses, real estate taxes, food, hydro, gym expenses, etc.
- Fun or Choices Money: these are items that may be based on what you want to do with your time.
This is very specific to each individual or family. It can make a big difference whether your goal is to travel the world birdwatching or write a novel. These are the specific items you may wish to accomplish or do from your own bucket list, such as traveling, golfing, surfing, and traveling the world with your rock band.
I would suggest you go through the exercise yourself to determine your “ideal” retirement spending target. What I have found is people spend less on themselves than they think but require more capital than they realize to fund a 30 plus year retirement.
The Next 5-year Period
Your spending needs will change as life happens. Most retirees can develop a good idea of what they are going to be spending for the next five years, and after that it is more of a general projection.
Please remember, retirement planning is not a one-time event. Your strategy has to be updated and adjusted on a regular basis to make sure you are still on track.
For more information, you can refer to Preserving Wealth: The Next Generation - The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
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