There’s a financial planning rule of thumb saying that in retirement you’re likely to spend 75 per cent of what you spent before retirement.

It works on the basis that many of your before-retirement costs will be significantly lower (such as transport and clothing), and is meant to help you plan the income you need in retirement.

However, in my view, this 75 per cent rule is a blunt instrument that has little use. It takes no account of the different stages of retirement and the spending patterns within each stage. Yes, it may be true that across the whole period of retirement we spend 75 per cent of what we do before retirement, but this takes no account of the ups and downs of retirement expenditure.

One hundred years ago, life expectancy was about 50 years. This left little or no time for most people to have any sort of retirement, and certainly not the decades of golden years that we now expect.

For most people, retirement now lasts for such a long time that it would be quite wrong to think of it as just one phase. In fact, it’s possible to divide retirement into three stages, each with its own planning challenges.

All go

The first stage of retirement could be called ‘all go’. This is the time when people have just stopped work and use their new-found freedom to do many things they have longed to do for years. It is a time of activity, as most people in their sixties and seventies have the energy and the health to travel, play sports, socialise and do other things on their bucket list.

This is the most expensive part of retirement. In my experience, people often find that their expenditure actually rises when they retire: far from living costs falling to 75 per cent of what they had previously been, they’re actually greater. These people have time to spend money as they travel and enjoy their leisure.

Although the ‘all go’ stage is an exciting and active time, from a financial point of view it can be difficult. You may be used to decades of a steady income (a cheque every second Thursday), while in retirement you have to somehow use the capital you have accumulated to generate a reliable income.

That’s never easy – tolerating the volatility of the markets is hard and, especially at this stage of life, you don’t want to make a major investment mistake.

Slow go

The second stage of retirement is called ‘slow go’. This is a time when life begins to slow, and sport, travel, and socialising become more difficult.

For many, this stage might start in their mid-seventies, although no one rings a bell at the start – and I know many people who are active well beyond that age.

Those habits which were expensive in the ‘all go’ stage diminish, and expenditure falls accordingly. From a financial point of view, this is perhaps the easiest stage of retirement. The demands on your cash reserves are lower, and by now you’ve had a bit of investment experience.

No go

The third stage of retirement is often called (rather unkindly) ‘no go’.

Activity slows sharply, but from a financial point of view there is little let-up. Some people find that although they spend less money on activities, they spend more on support and care. This can make this stage an expensive time of life.

What to do

You can see from these three stages that you will probably need more money at the start than you will in the middle stages of retirement. However, you could well need a good deal in the third stage as well.

You may have some additional income early on in retirement from part-time work. Lots of people now do some paid work in retirement; in fact, 40 per cent of people aged 65–70 are in some kind of paid work. This may be a good way to fund the things you want to do.

Alternatively, many people downsize their house to free up capital. Generally, this should be done in the ‘all go’ stage, when retirement is probably at its most expensive.

Be sure your new house is future-proof – as you get older, you’ll find a two-storey house, with its stairs, more and more difficult to manage. If you can, buy something early that you’ll be able to live in for the duration.

Retirement can be the best years of your life. With good management, it can be a long and satisfying phase – but you do need to think ahead and make a good plan.

First published 15 August, 2017

By Martin Hawes, AFA

Martin Hawes is the chairman of the Summer KiwiSaver Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd. You can obtain the scheme’s product disclosure statement and further information about the scheme on its website, www.summer.co.nz. Martin is an Authorised Financial Adviser and disclosure statements are available from Martin Hawes on request and free of charge.

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