The 3 Phases of Retirement and How to Plan for Them
When workers think about what retirement will be like, they often imagine it as a single monolithic event -- as if they can pursue their favorite activities every day until their last. But in reality, retirement is a three-stage event, and for most retirees, each stage is considerably different. Knowing how your expenses will likely change over time will help ensure that your money lasts as long as you do.
During the first decade or so, new retirees are stretching their wings and learning just what this retirement thing is really like. Because new retirees are relatively young, they're often in good health and have a relatively high energy level, so they're ready and eager to embark on adventures like world travel. However, our natural desire to live it up after decades of work means that this first decade is typically an expensive one for retirees. That's why it's important for retirees to build significant flexibility into their initial budget, perhaps planning to spend 10% to 20% more per year during the first 10 or so years of retirement. For example, if you think you'll need $50,000 in annual income in retirement, aim instead for $55,000 or $60,000 per year. With this approach, if it turns out you were optimistic about your income needs, you'll still have enough to get by.
Part of the challenge of this early retirement period is that while you need a relatively large income, you also want to keep your retirement account withdrawals fairly low. After all, the money in those accounts needs to last you for the next 20 to 30 years; if you deplete them too much early on, you'll be sure to run out of money down the road. Assuming your investments earn average returns (say, 7% per year if you're invested mostly in stocks), it's best to limit your withdrawals to 3% to 3-1/2% of the entire balance per year for the first five to 10 years of retirement. If your returns are particularly good during the year, you can take a little more. On the other hand, if your returns are bad or even negative, keep your withdrawals as small as you can possibly manage.
Source: Fool.com
