Spending Patterns in Retirement



Clay Gillespie

Managing Director, Financial Advisor & Portfolio Manager


There are three stages to retirement – the first stage is called the ‘Go-Go’ stage, the second the ‘Slow-Go’ stage and the third is the ‘No-Go’ stage.  We would all like to spend most of our retirement in the ‘Go-Go’ stage of retirement. This stage of retirement is typically very active as your energy is high and you are fulfilling your retirement dreams, the Slow-Go stage is when your energy starts to wane. Your health might not be a major factor but you just don’t have as much energy as you did earlier in retirement. You probably have seen older relatives or friends go through this stage. The No-Go phase is when your activities are restricted because of health and other physical or mental impediments.

How much income do I need in retirement to maintain my lifestyle in retirement?

A lot of work has been done on this topic.  Your so-called “(income) replacement ratio” represents how much of your pre-retirement income that you need to maintain your lifestyle in retirement.  There is some research that suggests that you only need 50% of your pre-retirement income in retirement, while other studies suggest you need 110% of your pre-retirement income to maintain your lifestyle.  The majority of the studies suggest that you need between 60% and 80% of your pre-retirement income to maintain your lifestyle during retirement.

In fact, the right amount is based on what you plan on doing in retirement.  Many studies suggest the lower your pre-retirement income the higher replacement ratio required, and the higher your pre-retirement income the lower the retirement ratio required. This makes sense as the lower your pre-retirement income the more that is used for non-discretionary expenses like rent and food and other essential spending.

We now move on to a discussion about initial withdrawal rates expressed as a % of the funds you have available for income.  How much can I withdraw from my investment assets and not run out of money. The initial withdrawal rate was originally pioneered by William Bengen in a 1994 Journal of Financial Planning article.  His research suggested that an initial annual withdrawal rate of 4% (indexed by the consumer price index every year) allows you to maintain the ability to generate sustainable income throughout retirement. More recent studies have suggested that the initial retirement income should be no higher than 2.5% to 3%, given today’s low investment return expectations.

These studies have been really important in the development of advanced retirement income strategies, and gives financial advisors the basis to make informed recommendations to their clients.

The only problem is that to do this type of empirical research some of the variables need to be held constant throughout the analysis. In this case it is assumed that retirees need a constant real income through their entire retirement years. Do they?

Let’s look at this a little closer. 

Our Experience

Over the years of helping clients move through retirement we have seen a different experience.

The first 2 to 3 years of retirement tend to be the most expensive, as you are dealing with pent-up demands that you did not not fulfil while working full-time as you did not have the time.

The first two years are often treated like a vacation and can be very expensive.

In some cases, the last two years of retirement can also be very expensive because of long-term care costs.

We’ve also found that our clients do not need to increase their income every year by the rate of inflation to maintain their lifestyle in retirement. In most cases we find that they usually only increase their income every three or four years.

We’ve found that many clients start to slow down later in retirement and spend less money as they become less active.  This slowdown in activity tends to become quite pronounced around the age of 80.

If the above spending patterns are true then you should be able to start with the 1) higher initial withdrawal level; 2) retire earlier; or 3) save less.

We have found that clients can start with an initial withdrawal rate up to 5.5% and maintain their lifestyle throughout retirement.

What does the research suggest?

As mentioned earlier the major issue we have with much of the research being done about income in retirement is that much of the research assumes that retirees need a constant net spendable income (after-tax and inflation) throughout their retirement years.

In 2005 in an article by Ty Bernicke (Reality Retirement Planning: A New Paradigm for an Old Science) suggested that under traditional retirement planning, consumers tend to over-save for retirement, underspend in their early years of retirement, or postpone retirement.  His research suggested that household expenditures actually decline as retirees age.

In 2013, David Blanchett wrote a paper called; Estimating the True Cost Of Retirement. In this paper he found that retiree expenditures do not, on average, increase each year by inflation. He goes on to suggest that there appears to be a “retirement spending smile” as expenditures decrease in real terms for retirees throughout retirement and then increase toward the end of their lives to deal with health care costs (US study).


The research tends to support our experience that retirees’ income does not need to increase with the rate of inflation throughout their retirement years.

The conclusion we draw from these results is that we do not want our clients to sacrifice income in the early years of retirement assuming that they will need increase their income every year by the rate of inflation.

We want everyone to enjoy the early (“Go-Go” years) of retirement!

Clay Gillespie, BBA CFP CIM
Financial Advisor & Portfolio Manager
Managing Director
RGF Integrated Wealth Management

[email protected]

Search Insights
Book a meeting
Schedule a meeting with an RGF Advisor.