The Retirement Age Bands
The traditional approach to saving for retirement has been to accumulate a nest egg that’s large enough to replace your income once you’ve stopped working, and to sustain a stable standard of living throughout your retirement. If you don’t have enough money saved up to maintain your current lifestyle for the next few decades, well, you’re not ready to retire, right?
But a growing body of research now suggests that this traditional tactic may not be entirely appropriate after all. What we’re finding is that retirees don’t actually maintain a stable lifestyle throughout their retirement years. Instead, their spending behavior shifts over time, and it tends to decline in real terms as the decades pass.
In fact, not only does spending decline in the later years, but what retirees are spending their money ON begins to shift as well, as the retiree crosses through these different “age bands”. Michael Stein in The Prosperous Retirement described these age bands as the Go-Go years for the first decade of retirement, the Slow-Go years for the second decade, and the No-Go years, which represent the final decade.
During the Go-Go years, people tend to continue their pre-retirement lifestyle. As they hit the Slow-Go years, they become less active, as their health and energy start to decline, and they slow some of their discretionary spending. In the No-Go years, most of their discretionary spending stops altogether as it’s replaced by health care expenses.
The Bureau of Labor Statistics Consumer Expenditure Survey also shows a very clear trend: retirement spending declines, persistently, over time. And yes – health care expenses do go up, but they don’t match the decline in discretionary spending.
So what does this mean for your financial plan? What this tells me is that rather than using traditional models that mandate annual increases in income over three or more decades, a more detailed approach is necessary. We need to look at not just what your spending goals are, but also how your retirement expenses will change over time as you move through those different age bands. This is important, because when we consider both your spending goals AND your spending patterns, you may find that your nest egg doesn’t need to be as big as you thought; and maybe – just maybe – you can retire when you want to.
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Raymond J. Lucia Jr. is Chairman and CEO of Lucia Capital Group, a registered investment advisor, and of its subsidiary broker-dealer, Lucia Securities, LLC, member FINRA/SIPC. Advisory services offered through Lucia Capital Group, a registered investment advisor. Securities offered through Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.
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