What’s your retirement number? We’ve all heard the marketing. This question is based on asset accumulation. The problem with using this approach for retirement planning is we don’t know how long our retirement will be.
The Right Question
The important question to ask is “what is the amount of sustainable income that I will need during the different phases of my retirement?” Asset accumulation is normally the goal in financial planning. Developing sustainable income should be the priority in retirement planning.
The primary purpose of sustainable income is to create a predictable amount to cover nondiscretionary expenses throughout the phases of retirement. These expenses may include mortgage, rent, property taxes and food, repairs, utilities, etc.
Phase 1 is the active retirement phase. It is the early retirement phase when we tend to be physically and mentally capable of living an active lifestyle. In fact, the phase may not be that much different than pre-retirement except that there may be more time to do things like travel and hobbies. Many retirees in this phase actually find themselves more active than they were in pre-retirement. This is the most costly retirement phase.
Phase 2 takes place between age 70 and 82. You’re spending lots of time with family and friends now, but you’re also devoting more time to doctor visits. Here retirement patterns have developed and life seems more stable and predictable.
Phase 3 means time and age play a role in slowing down activities and abilities for some but many still enjoy travel and leisure activities. Discretionary spending may be reduced in this phase.
Spending Through the Phases
Understanding the three phases of retirement can have a very significant impact on planning. In terms of spending it makes sense that we typically have less discretionary spending as we age. The good news is we are all living and staying active longer and can expect 20, 30, even 40 years of retirement.