The Retirement Spending Smile

Think of retirement and many people instantly smile. Dreaming of not having to set an alarm clock every weekday, more time to spend on hobbies and family and two or three decades of just enjoying life.

This smile indicates visually how retirees will spend money and will help you, the later life finance expert, in planning their finance needs utilising their equity laden property. It’ll help you decide whether drawdown, lump sum or income is appropriate.

To begin, let me show you the three phases of retirement spotted by Michael Kitces:

The Go-Go years are popularised with spending on hobbies and achieving the so-called “bucket list”. Health and movement are enjoyed for around a decade or so. But then people slow down in their next decade – the Slow-Go years. The body slows naturally, and activity subsides. The latter years are dominated by the need for healthcare and support during the No-Go years.

This concept was turned into the “Retirement Spending Smile” by David Blanchett in an article from Forbes in 2014. Here’s his dollar-based graphic, notice the smile:

I admire the logic of it. Go-Go years can be expensive, so the retirees need plenty of cash to spend. Either a lump sum or drawdown would work here to provide maximum income during this decade. The Slow-Go years require a smaller level of income, so drawdown can be paused or lowered; enough to provide a standard of living. The No-Go years require expensive healthcare provision, so drawdown can be ramped up to provide in-home care. Eventually, the house can be sold to pay for full-time residential care.

Drawdown options with equity release oddly, are most popular, and you can see why. Turn them on and off according to demand.

Naturally, everyone’s life is different, but this smile is uncannily accurate. My Dad, for example, is now 82 and is rapidly slowing down. Their major activity is walking the dogs. I’m preparing for his expensive No-Go period right now.


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