Does the income I need in retirement change over time?
Updated 26 February 2019
Are you likely to need as much money at the start of your retirement, as you will, say, 10 or 15 years later?
This is an intensely personal question. It depends on what age you retire at, your state of health, how you are spending your retirement and many other factors personal to you. It’s also important to consider that inflation will usually erode the value of your income over time. This means even if you spend your income in the same way and on the same things throughout your retirement, you’ll need more money each year just to counter inflation.
Nevertheless, ignoring the impact of inflation, are there highs and lows in the amount of income needed at different points in retirement? The answer is usually yes. Expenditure does change during retirement.
To understand this better, it is helpful to split retirement into three distinct phases.
- The active period. This is the period immediately after retirement. Most of us are still in good health, so we make the most of the early years of retirement doing all the things we always promised ourselves we would. Consequently, expenditure can be high during this period. How long this can last for will differ from person to person, but it could be 10-15 years in many cases, perhaps even more.
- The transitional phase. At some point, most of us begin to slow down a little. We may still be active, but not quite as fit and able as we used to be. Ill health may have developed and we start to feel our age a little more. This period is likely to be characterised by a reduction in expenditure as we slow down and take things a little easier.
- The passive stage. Eventually poor health often occurs and in turn leads to reduced levels of energy. Deteriorating eyesight can impede mobility if it means giving up driving a car and this can limit opportunities to socialise. For many, this will lead to lower costs and expenditure, but this may not be the case if long term care is required. The costs of care can be substantial and can lead to people selling their home to pay for it.
In summary, the pattern of expenditure can change over time during retirement. Ignoring inflation, if long term care is required towards the end of retirement, then the pattern of expenditure is U shaped with peaks at the beginning and end. If expensive care isn’t required then the likelihood is that the amount required to live on in retirement will decline over time (again, leaving aside the impact of inflation).