Go-Go vs. Slow-Go Spending in Retirement

Oftentimes as retirees head into retirement there is some uncertainty about what monthly expenses will be. Pre-retirees may assume their spending will drop, at least to some extent. That may be the case for the average US retiree because they don’t have the income to support their pre-retirement lifestyle. But a retiree who has saved a nice nest egg may want to spend in a similar fashion, if not more.

The data shows that most retirees with $1-$3M in a nest egg spend 100% of their pre-retirement spending until roughly age 75. It then begins to decline by 20-30% until age 85, at which point it may decline by an additional 10% but there may be increased healthcare costs to consider.

JPMorgan 2023 Guide to Retirement

Consider these three phases (Go-Go, Slow-Go, and No-Go) in your retirement projections. If you can commit to a drop in expenses later in retirement, it frees up more resources for spending earlier in retirement during the years when you are more active and able to enjoy it.

Consider a 65-year-old couple with $1,200,000 saved in retirement accounts and Social Security income of $5,000/month between both spouses. They divide their financial goals into a few different buckets, calculated using long-term financial projections.

Baseline Spending - $6,000/month. This is the amount they want to have for normal monthly spending throughout their lifetimes. I consider this expense their Minimum Lifestyle Floor. Their Social Security covers $5,000 of this and another $200,000 of the portfolio is set aside to cover the remaining $1,000.

In addition, they carve out a few “set-asides” for future spending.

Set-asides

(1)    Aging-related expenses - $300,000 of the current portfolio value. This is set aside for long-term care-related expenses, represented by the purple triangle in the picture above.

(2)    Surviving spouse buffer - $200,000 of the current portfolio value. Since the smaller Social Security check will go away when one spouse dies, they calculated the current need to replace that monthly amount is $200,000. This amount will decrease over time as they age.

(3)    General buffer - $200,000 of the current portfolio value. This is an amount that they decided to reserve for unexpected costs that haven’t been accounted for.

Fun Go-Go Spending – $300,000 of the current portfolio value. All of the work above is done to arrive at this figure. $300,000 of the current portfolio value is set aside for extra spending. They decide to reserve $50,000 for the “slow-go” phase and $250,000, or $25,000/year in extra go-go spending.

Between baseline spending and all the set-asides, they have put a name to each dollar of the $1,200,000 they have saved.

As long as they can commit to dropping expenses later on, this will result in higher spending early on as they spend the extra “Go-Go” money during the first 10 years of retirement.

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.