When it comes to retirement planning, it’s easy to think of retirement as a single, unchanging phase that you enter when you stop working and that lasts for the rest of your life. But in fact, retirement is actually made up of several distinct stages, each of which involves different expenses and requires a different approach to budgeting.
Rather than creating a “set it and forget it” retirement plan, therefore, it’s important to take time at each retirement stage. Review where you’re at financially, understand what to do next, and adjust your budget accordingly. Read on for a look at the four stages of retirement, as defined by Investopedia, and at the most important financial steps to take at each stage.
1. Peri-retirement: age 50-62
Peri-retirement is the term for the crucial period of time you’ll go through in the years before you actually retire. At this point, retirement is no longer a far-off, theoretical stage: it’s an event that is going to become reality sooner rather than later.
Consequently, peri-retirement is the perfect time to assess your finances and evaluate whether or not you’re financially ready to retire. At this point, you should have a clearer idea of what your likely income and expenses will be once you leave the workforce than you might have even just a few years ago.
Take stock now of things like pension and Social Security benefits, the balance in retirement plans such as 401(k)s or IRAs, and money still owing on a house or car. This is also a good time to re-evaluate your monthly expenses. See if there is room to eliminate any wasteful spending that could cut into your retirement budget.
Note that 62 is designated as the end of peri-retirement because this is the age at which you can first qualify for reduced Social Security payments. However, depending on your situation, you may choose or need to retire earlier or later.
2. Early retirement: age 62-70
The years after you first retire is the period during which you can expect to see some of the biggest changes to your budget. Unless you have a pension, you won’t be receiving any kind of payments from your employer.
You’ll need to make a decision about when you want to start claiming Social Security benefits. You may also need to sign up for some form of marketplace plan to replace your employer-sponsored health insurance. Many experts also advise buying long-term care insurance, which could stand you in good stead later in your life.
One particular phenomenon that you should be aware of in your early retirement is the temptation to go on something of a spending spree. This urge strikes many new retirees. You’ll hopefully still be healthy and energetic, and you may want to immediately make the most of your newfound free time by buying that sports car you’ve always wanted, taking an extended international vacation, pursuing a time-intensive hobby like sailing, or even going back to school.
However, it’s very important during these early years not to confuse retirement with winning the lottery. Stick to the budget you made in your peri-retirement phase, which will hopefully have made room for most of your retirement dreams. Remember that if all goes well, you’ll still have many more years of retirement left that you need to finance.
3. Middle retirement: age 70-80
Depending on the choices you made in early retirement, you may find in middle retirement that your income actually grows. This is because you can only hold off from claiming Social Security benefits (and consequently receive an increased payment) until age 70. Likewise, certain types of retirement accounts will require you to start taking minimum distributions at age 70.5.
Other factors that might create more room in your budget at this stage are decreasing expenses you may find that you’re not wanting to travel quite as much as you did when you first retired, for example. In addition, it’s likely you are no longer paying for long-term disability or term life insurance, as those types of policies usually expire at age 65.
One of the most important financial steps you should take at this stage is to review and update your will or estate plan. It’s certainly true that planning for the end of your life can be a difficult thing to do, but it’s always better to do it sooner rather than later. You may also want to think about granting financial power of attorney and healthcare power of attorney to one or more people you trust.
4. Late retirement: age 80 and up
Medical expenses are typically at their highest in late retirement, especially if you’re dealing with a chronic condition or an acute illness. You many also incur significant new expenses if you make the choice to move to some type of assisted living facility, or if you need to hire a home health aide (long-term care insurance can help ease the burden of some of these costs).
Otherwise, unless you make a major change like moving house, your late retirement expenses should be similar to what they were in middle retirement. When you reach late retirement, it’s a good idea to reassess your nest egg, and determine whether the rate at which you’re withdrawing money is appropriate for your ongoing situation. As part of this evaluation, you’ll need to think about expenses you’re still anticipating during your lifetime, as well as what you want to leave to others.