How to plan your retirement spending

Failing to prepare is preparing to fail. This expression is especially relevant to retirement finances. 

However, budgeting and spending in retirement is not as straightforward as it once was. It’s no longer just a case of retiring and receiving a fixed income throughout your retirement.

Retirement today is markedly different from the past. In the 1960s, men typically retired at 65 and women at 60.

At that time, men could expect to live for an average of 12 more years, while women generally lived to 80.

As of 2024, a 65-year-old man has a one in four chance of living to 92, and a 65-year-old woman has the same chance of living to 94. This extended lifespan has significant implications for retirement planning.

Retirement planning and spending are no longer fixed; many people return to work, part-time or otherwise, to stay active and engaged. However, a longer life doesn’t always mean a healthier one.

On average, individuals will spend a significant portion of their retirement years in ill health, making budgeting and planning less predictable. Your spending patterns may fluctuate as health and energy levels change.  

How do I work 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.

What are the 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.

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 can I 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.  

According to the Pensions and Lifetime Savings Association (PLSA), a couple aiming for a 'moderate' retirement will need around £43,100 per year, allowing for financial security and flexibility.

This would cover essential expenses such as food, housing, and transport, with enough left for leisure activities like dining out, hobbies, and a few holidays each year.

For a couple looking to enjoy a 'comfortable' retirement, the estimated cost rises to £59,000 annually.

This higher figure provides more financial freedom and includes luxuries such as more frequent dining out, extensive travel, and more spending on hobbies. For instance, a 'comfortable' lifestyle could include long-haul trips, a new car every five years, and up to three UK weekend breaks each year.

Understandably, holidays and travelling are often important for retirees who want to use their hard-earned spending money in retirement. 

Couples on a 'moderate' income could afford a fortnight 3-star all-inclusive holiday in the Mediterranean and a long weekend break in the UK each year. For those on a 'comfortable' income, this expands to a fortnight 4-star holiday in the Mediterranean, with spending money, along with three long weekend breaks in the UK annually.

While these travel expenses may be higher in the earlier years of retirement, spending patterns often shift as you age.

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, travel, 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.  

Get expert financial advice

Planning your retirement spending might seem overwhelming, but it’s also your chance to shape the future you’ve worked hard for.

By thinking ahead and aligning your finances with your lifestyle and goals, you’ll have a clear path through each phase of retirement.

Whether you’re aiming for a moderate or comfortable life, the key is to adapt as your needs change. 

After all, retirement should be about enjoying the fruits of your labour, so plan smart, stay flexible, and make the most of your golden years.

Let Unbiased match you with a financial adviser for expert financial advice on planning your retirement spending and securing a comfortable future.