Financial planners talk about three phases in retirement: The go-go years, the slow-go years and the no-go years.
Expenses tend to be highest at the beginning and end of retirement – creating a U-shape. But many people think of retirement spending as a constant variable.
“As they enter retirement, especially early in retirement, they see themselves spending all sorts of money and then they can’t envision themselves cutting back,” says Jonathan Swanburg, a certified financial planner in Houston, Texas.
But the big trips and experiences you are planning for your golden years are often one-time things and, as you grow older, you may naturally travel and spend less.
Then at the end of life, there is a sharp rise in spending on things such as long-term care.
“It kind of looks like a smile when you look at all the numbers,” says Michelle Crumm, a financial planner in Michigan.
Here is how to lean into this spending pattern.
1. Clarify your goals
A U-shaped retirement plan works for many people – but not all. You and your financial professional should discuss what you hope to get out of your retirement.
“If it’s a couple, you’ve got to make sure they’re on the same page,” Ms Crumm says.
Some people, she says, want to enjoy holidays up to the last day of their lives, buy new houses or always give money away.
“They’re not good candidates for a smile strategy.”
2. Keep fixed expenses low
The more you can simplify your balance sheet – pay off your mortgage, eliminate credit card debt – the more freedom you will have to adapt your retirement spending as needed.
If the stock market takes a dive, you can drop discretionary expenses so you withdraw less from your savings that year.
“It’s figuring out where we can cut back in the event that things do go haywire,” Mr Swanburg says.
For retirees with larger fixed expenses or who are supporting their children, it may not be possible to budget for swanky trips in early retirement years.
“Maybe we do not have those big early expenses because we don’t have a lot of levers to pull in the event they need to cut back,” Mr Swanburg says.
3. Make plans for long-term care
People spend more in late life on health care and long-term care, creating the back end of the U-shape. Long-term care insurance (or a product like it) can make a big difference here.
Hybrid policies that combine permanent life insurance with a long-term care rider have the advantage of paying out a benefit to someone no matter what happens, but they can be expensive.
If clients do not have long-term care insurance, “we usually recommend holding back $300,000 because that’s, on average, what people are going to need for long-term care”, Ms Crumm says.
If you have equity in your home, you may be able to use that to cover end-of-life expenses.
“In most situations, you can take that home equity and repurpose it for the extra expenses related to long-term care,” says Joel Cundick, a financial planner in Virginia.
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4. Manage income strategically
The way you withdraw income affects everything from the taxes you pay to the price of health care.
You might benefit from offsetting capital gains by claiming losses. Working with an adviser on retirement income optimisation can give you more flexibility when you need it.
“There are smart ways to take money out of the retirement plan, and there are smart ways to set yourself up for retirement income,” says Catherine Valega, a financial planner in Winchester, Massachusetts.
“Work with someone to make sure you are tax optimising your financial life.”
