For every five years longer a retiree lives, he or she spends about 15 percent less on average. This means that people in their 70s spend about half of what they do in their 50s. Even with the ramp-up in medical expenses that often comes later in life, retirees still tend to spend less as they progress through what is termed the three phases of retirement.
One study found that nearly 40 percent of retirees spend an above average amount on food and beverages (“foodies”), 30 percent tend to spend more on home-related expenses (“homebodies”) and 5 percent are travel enthusiasts (“globetrotters”).
These are some categories by which to measure your own spending objectives in retirement, as they can help you establish a retirement income withdrawal level that can help meet your lifestyle goals, but note that they may also curb downward and change as you get older.
While identifying the typical spending behaviors of retirees can be helpful when considering your own retirement income, every person’s situation is different. For example, someone who experiences a health care issue early on may find that their lifestyle spending decreases faster than a retiree who is a foodie or homebody.
Retirement should be a time to take a long-needed break — from working, from worrying and, hopefully, from scrimping and saving. You hope to be in a place in which you can spend for what you need, plus a little more now and then for your passions, whether that’s golf, the grandkids or the Grand Caymans.
As you build a financial strategy, consider each component. It may be effective to diversify your income sources among an array of sources, such as Social Security, pension and an annuity, along with options that may provide growth potential to generate cash flow to help pay for discretionary living expenses.
This calls for reviewing a number of factors, such as when to begin drawing Social Security. Recognize that each spouse may benefit from a separate strategy. If you have an employer-sponsored retirement plan, review plan rules on partial distributions once you’ve retired, as some can be quite restrictive and may require repositioning of those assets.
Before you finalize any distribution strategy, carefully review the tax status of each account you own to determine when to withdraw money so that you don’t tip yourself into a higher tax bracket in any one year. You should talk to a financial advisor and tax professional about how to create a tax-efficient retirement income distribution strategy.
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