The Myth of Steady Retirement Spending

You may be familiar with the so-called ‘4% rule,’ which can be used as an estimate for a person’s projected retirement spending. The rule says that if you invest in a mixture of roughly 60% stocks and 40% bonds, you can safely withdraw 4% of your nest egg annually without fear of depleting your savings. This rule, like most conventional wisdom, is a good place to start, yet only tells part of the story.

These days, most academics and financial advisers agree that spending varies quite a bit throughout your retirement. Most retirees tend to go through three stages of spending: the Go-Go Years, the Slow-Go Years, and the No-Go Years. Your spending likely increases during those first few years of retirement, as you see those bucket-list items (often very expensive) get checked off. The second stage sees the spending decrease as you settle into retired life, while those early big-ticket purchases fade away. The third stage usually sees your spending increase, though not to the extent of those first few years. Unfortunately, this increase is usually due to inevitable healthcare costs.

Ultimately, managing your finances during retirement, at least in some ways, will resemble your pre-retirement years: market ups and downs, planned and unplanned expenses, splurges, and frugality. With this in mind, be sure to plan for these different stages of your retirement years.

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