How to plan your retirement spending

Fail to prepare, prepare to fail. At least, that’s how the age-old saying goes — and when it comes to your retirement finances, this expression hits the nail on the head.

However, planning a budget and spending in retirement isn’t necessarily linear anymore, as it’s not just a case of retiring and receiving the same amount of income throughout the duration of your retirement.  

Retirement is very different these days. In the 1960s, men typically retired at 65, and women retired at 60.

Once retired, men could expect to live for 12 more years on average, whereas women fared a little better and could expect to live to 80.

And many people chose not to continue working in any capacity after retiring either. 

Fast forward to today, a 65-year-old man has a one in four chance of living to 91, and a 65-year-old woman has the same chance of living to 94.

This extended life cycle has profound consequences for retirement planning.

Retirement planning and retirement spending are no longer a fixed point, as many continue to return to the workplace once they’ve retired to feel more fulfilled.  

But it goes without saying that a longer life isn’t necessarily a healthier one.

On average, men and women will spend around half their retirement in ill health, meaning their retirement — and retirement spending and budgeting — is much less certain.

Your spending patterns will rise and fall as mental and physical decline inevitably cause challenges.  

Working out a retirement timeline 

As you prepare for retirement, it’s a good idea to work out a timeline for your retirement income and how your finances could be spread across the years.

Undertaking this exercise will give you a better idea of how long your money will need to last and the standard of living your finances will give you as well.  

As you start thinking about retirement, here are a few questions to ask yourself: 

• What do you want from your retirement?  
• Do you plan to retire at 66? 
• Would you prefer to carry on working, even part-time? 
• Do you have any dependents? If so, how long would you need/like to support them? 

• Do you own a business? What do you plan to do with it once you retire? 
• How is your health? Is there a possibility you could need long-term care in the future? 

Your answers to the above questions will have a part to play in shaping the timeline for your financial plan and will have an impact on how much how much income you'll need.

Phases of retirement spending 

Each phase of retirement calls for different levels of money and finances to see you through your day-to-day life. But what are the different stages? 

1. The go-go years 

This is the period right after you retire, when you try to maintain similar spending levels as before you retired.

But the added expenditures at this stage of retirement may be eating out and travelling more, as rewards for all the years of hard work.

And this is also your active phase when your energy and health are at their peak.  

2. The slow-go years 

Although you are still mobile and want to make the most of life, the slow-go years are where you will start to slow down, and your health and energy start to decline.

You likely won’t be travelling as much, and the things you do start to become a bit more routine.  

3. The no-go years 

This final stage is when most discretionary spending will have stopped, and the majority of your spending will be on core outgoings like housing costs.

Of course, the phases of retirement set out here aren’t an exact science.  

There are no exact time frames as to when a phase will begin and end as everyone’s retirement is different.

A lot of how long each phase runs out will depend on your wealth and health. But these phases will differ still if you require long-term care in the later stages of your life.  

And if this is the case, your spending pattern will be a U shape rather than a steady decline, whereby you will spend more in your early retirement years, with spending declining before it increases again to pay for care costs.  

How much do people spend in retirement? 

To figure out how much money you will need for retirement spending, it will be important to think about some retirement spending strategies.  

A Which? survey found a household with two people spend around £2,333 a month per household, or around £28,000 a year on average to be ‘comfortable.’

This sum would cover all the basic areas of expenditure (a combined cost of £19,000 per year on average), as well as some luxuries, such as eating out, hobbies and European holidays.  

And if you were to achieve this in your average retirement spending, it would certainly provide you with a good level of retirement. The research did find that people spent around four to five per cent less as a result of the Coronavirus pandemic in 2020 and 2021 — but definitely would have spent more on food, energy, and petrol as the year progressed.  

Interestingly though, if you were to include luxuries such as long-haul trips and a new car every five years, a couple would need £45,000 a year.  

Understandably, holidays and travelling are often important for retirees; being able to use their hard-earned spending money in retirement. The Which? survey found people would spend £4,657 a year on this part of their life.  

Of course, your priorities for your retirement spending will change slightly as you move through your retirement years.

Your average annual spending in retirement will focus more on utility bills, health and insurance premiums, particularly over the age of 80. As opposed to more retirement spending on food and drink, recreation, and housing payments in the earlier years. 

What else should I consider when planning for retirement? 

When thinking ahead, it’s best to consider the below: 

• Could you benefit from a self-invested personal pension?  
• Should you use life stage investment planning? 

• Should you buy a guaranteed pension income with an annuity? 
• Should you use income or pension drawdown? 
• Is releasing equity from your property right for you? 

And you’ll also need to think about the risks associated with planning for your retirement too, including longevity risk, investment risk, inflation risk and annuity risk.  

Whatever your decision, make sure you speak to a financial adviser to keep your retirement planning in check.