When we think about saving for retirement, we usually do so by addressing that time in our lives as one, long, happy period.
In reality, most people experience retirement in multiple phases. The first phase covers the early years of retirement. Retirees are still young, active and crossing off their "bucket list" items. All that fun tends to come with a bigger price tag so we tend to see new retirees spending go up.
The middle years of retirement are where that downward trend starts. This usually happens when retirees are settling into their lifestyles. Maybe they still spend part of the year somewhere warm, but they generally have a routine they follow, which tends to cost less money.
The last phase of retirement is actually where we start to see spending go back up often due to health care costs.
So how do we plan for all of this? Here's what we recommend when it comes to budgeting for each phase of your retirement.
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The Early Years
This phase tends to last for people up until about age 70, but will differ from person to person. Because some of that time may be spent before you are eligible for your full Social Security benefit, it's smart to plan to use tax-advantaged savings in this early part of your retirement. That could be a Roth IRA, Roth 401(k), health savings account or a similar investment, as long as you meet the requirements for withdrawals to avoid penalties and fees. At this time, you may also see a drop in your income as you move from earning income to withdrawing savings. This could mean you are in a lower tax bracket, making it a great time to consider a Roth conversion, which would mean you move your tax-deferred investments to a Roth IRA and pay the tax now at a lower rate than you would later when you have to start taking Required Minimum Distributions.
The Middle Years
This period tends to occurs for most people during their 70s and early 80s. Generally, they've settled into a comfortable routine, they've had their adventures and now they want to relax. This is also the time that everyone who is eligible is collecting Social Security and taking Required Minimum Distributions. However, sometimes your Required Minimum Distributions will exceed your spending needs and can push you into a higher tax bracket than is necessary. That's why we suggest considering a Roth conversion early in retirement so you can spend only what you need and avoid overpaying on taxes.
The Later Years
This period is when health generally starts to decline and long-term care may be needed. To avoid paying huge medical bills if you end up in poor health, we highly recommend investing in long-term care insurance before you retire. These policies can save you hundreds of thousands in the long run and keep spending down in this period of your life.
If all of this sounds complicated, that's because it can be, but you don't have to go it alone. Talk to your financial adviser about your own personal goals, values and health history so that together you can plan for a long, stable retirement at each phase.
