When you’re working, funding your lifestyle is straightforward: a steady paycheck covers your monthly expenses, and you save for any big-ticket items down the road. But once you retire, that paycheck goes away—and suddenly, you’re not just thinking about how to pay for today, but how to fund the next 10, 20, or even 30 years of life using your investment portfolio and other resources.
One of the most important (and often overlooked) aspects of retirement planning is understanding how your spending will evolve. That evolution has a direct impact on how you should invest your portfolio. If you’re in your 50s or early 60s and starting to plan for retirement, this is a critical concept to understand. Let’s break it down.
Spending in Retirement Isn’t Linear
Many people assume that once they retire, they’ll need the same amount of money every year, just adjusted for inflation. For example, if you need $100,000 in your first year of retirement, then you’ll need $103,000 the next year, and so on.
But real-life spending doesn’t usually follow that pattern.
In fact, research shows that spending tends to follow what’s often called the “retirement spending smile.” In the early years—your “go-go” years—you may actually spend more as you travel, pursue hobbies, or check off bucket-list items. Then, spending tends to taper during your “slow-go” years, often around your 70s and 80s, before it ticks up slightly again in later years as healthcare costs increase.
On average, retirees tend to spend about 25% less in real (inflation-adjusted) dollars by age 84 than they did in their early retirement years.
Why It Matters for Your Portfolio
Understanding how your spending changes over time can help you invest more strategically. Instead of assuming you’ll need to withdraw a fixed percentage from your portfolio forever, you can adjust your investment strategy to support the actual flow of income you’ll need across different retirement phases.
For instance:
- Early Retirement: You may need to withdraw more from your portfolio, especially if you haven’t started taking Social Security or a pension yet. Your portfolio will likely be your main income source. This is where a flexible withdrawal strategy is key—maybe you withdraw 6% or 7% for a few years, knowing that your needs will decline later.
- Mid Retirement: Social Security kicks in, and expenses start to stabilize or decline. At this stage, your portfolio may not need to carry as much of the load, which can help preserve your assets for the long term.
- Late Retirement: Healthcare costs may rise, but most other spending categories—like travel and dining out—tend to decrease. If you’ve planned ahead, much of these expenses can be supported by insurance, Social Security, or targeted savings.
Practical Tips for Planning Around Changing Spending
1. Start with Expenses, Not Income.
Before thinking about where your retirement income will come from, get clear on what your expenses will be—and how they might change over time. Five years before retirement is a great time to start detailed tracking.
2. Build Flexibility Into Your Plan.
Your retirement plan doesn’t need to be perfect—it needs to be adaptable. Maybe you draw more from your portfolio early on and less later. Maybe you spend less one year if markets are down. Small changes in spending can have a big impact on long-term sustainability.
3. Don’t Get Hung Up on a Single Withdrawal Rate.
Rules of thumb like the 4% rule are useful, but they aren’t gospel. Retirement isn’t static. It’s okay to take more than 4% in some years and less in others. What’s most important is the overall trajectory of your plan and your ability to adjust.
4. Keep a Healthy Allocation to Stocks.
Even in retirement, you need your portfolio to grow. Stocks help you stay ahead of inflation and maintain purchasing power over decades. While your risk tolerance matters, most retirees can’t afford to be too conservative. For many, keeping at least 50% in equities is a reasonable starting point.
5. Have a Cash Buffer.
Consider keeping 2–5 years of living expenses in cash or bonds. This helps you ride out market downturns without needing to sell stocks at a loss. In strong market years, draw from your investments. In down years, lean on your cash.
Real-Life Implications
Let’s say you’re 65 and plan to delay Social Security until age 70. You might spend more in those first five years, especially on travel or big experiences, while your only income source is your portfolio. But once Social Security begins, that income gap narrows—and your spending likely tapers.
Understanding this allows you to feel confident withdrawing more early on, knowing that future needs may be lower. It also helps you invest more intentionally—allocating enough to growth assets to protect purchasing power, while holding safer assets to fund near-term spending.
Final Thoughts
The big takeaway? Retirement is dynamic. Your lifestyle, expenses, and income sources will evolve—and your portfolio should be built to evolve with them.
Retirement planning isn’t about perfection. It’s about creating a flexible, durable plan that supports the life you want to live. So track your expenses, stay invested for growth, and remember: You saved all this money to enjoy it.
And as always, save early and save often—your future self will thank you.