Does the income I need in retirement change over time?
Updated 07 July 2023
It’s a personal question - it depends on what age you retire at, your state of health, how you're spending your retirement and many other factors unique to you. It’s also important to remember that inflation will usually reduce the value of your income over time. This means even if you spend your income in the same way throughout your retirement, you’ll need more money each year just to counter the rising cost of the things you buy and services you use.
To understand it better, it’s 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 doing all the things we always promised ourselves we would. As a result, we can spend a lot of money during this period. How long this lasts 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 energetic as we used to be. Some 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 spending as we take things a little easier.
- The passive stage. When poor health occurs it can lead to reduced levels of energy and mobility, particularly if deteriorating eyesight means giving up driving a car. For many, this can limit opportunities to socialise and lead to lower costs and outgoings, 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 amount you spend during retirement usually changes over time. Ignoring inflation, if long term care is required towards the end of retirement, then the pattern of expenditure is U shaped - peaks at the beginning and end. Even if expensive care isn’t required, the likelihood is that the amount you need to live on will still decline over time (again, leaving aside the impact of inflation).