When planning for retirement, many people focus on one question: ‘How much money will I need?’ While this is an important consideration, the reality is that retirement spending is rarely static.
Retirement is a journey, not a single event
Retirement today can last several decades. Thanks to rising life expectancy, it’s not uncommon for people to spend 25, 30 or even 40 years in retirement.
A common mistake is to assume that retirement spending remains constant from the day you stop working through later life. Over such a long period, your lifestyle, interests and spending habits are unlikely to remain the same.
In reality, your spending is likely to change significantly over the course of retirement, influenced by factors such as lifestyle choices, health, family commitments and shifting priorities.
Retirement often unfolds in three broad, but distinct phases, each with its own financial demands and opportunities: active retirement, settled retirement and later-life retirement.
While everyone’s experience will differ, understanding how your spending could change throughout these stages can provide a useful framework for financial planning.
This framework can help you build a more realistic retirement plan, produce accurate income projections and ensure your financial resources are available when you need them most.
Stage One: Active retirement
Making the most of your newfound freedom
The first phase of retirement is often the most exciting and rewarding. After years of balancing work commitments, commuting and family responsibilities, many retirees finally have the time and flexibility to focus on themselves and on the experiences they postponed during their working lives.
This period is often characterised by good health, high energy and a desire to embrace new opportunities. For many retirees, this is also the stage at which spending reaches its peak.
Common priorities during active retirement often include extensive travel and holidays, long-haul trips and cruises, home renovations and improvements, new vehicles, leisure activities and hobbies, sports and club memberships, dining out and entertainment, supporting children or grandchildren and pursuing lifelong ambitions and experiences.
Some people choose to buy holiday homes, relocate abroad or embark on long-term travel adventures. Others invest in hobbies such as golf, sailing, photography or gardening. These activities can significantly increase spending compared with later stages of retirement.
The retirement ‘bucket list’ effect
Many retirees enter retirement with a list of experiences they’ve long wanted to pursue. Whether it’s travelling around the world, learning a new language, renovating a dream property or spending several months each year abroad, these aspirations often require substantial financial resources.
As a result, retirement income needs during this period can sometimes exceed those in working life. Planning for this spending surge is essential. Underestimating costs in retirement can place unnecessary pressure on retirement savings and potentially compromise future financial security.
Maintaining flexibility
While this phase is often associated with higher spending, it also offers opportunities to adjust plans as circumstances change.
Some retirees continue working part-time or take on consultancy work, generating additional income while maintaining flexibility and purpose. Others may choose to delay certain ambitions until they have a clearer understanding of their long-term financial position.
The key is to ensure your retirement plan provides enough flexibility to support your desired lifestyle without jeopardising future income needs.
Stage Two: Settled retirement
A shift towards stability and routine
As retirement progresses, spending patterns often become more predictable. The excitement and novelty of the early retirement years may gradually give way to a more settled lifestyle.
Travel may become less frequent, major purchases may already have been made, and many retirees establish routines that require less discretionary spending.
This doesn’t mean retirement becomes less enjoyable. Instead, priorities often shift from exploration and adventure towards comfort, stability and quality of life.
Typical spending during settled retirement often includes household bills, food and groceries, insurance, travel, leisure activities, domestic holidays, socialising with friends and family, and home maintenance.
While discretionary spending often declines compared to active retirement, essential spending continues. For many retirees, this stage offers greater certainty about income and spending, making budgeting easier and financial planning more predictable.
The danger of complacency
Although spending may stabilise, it’s important not to become complacent. Inflation continues to affect living costs throughout retirement. Utility bills, food prices, insurance premiums and service charges can all rise significantly over time.
A retirement income that feels comfortable at 65 may not provide the same purchasing power at 75 or 80. This is why retirement plans should be reviewed regularly to ensure income remains aligned with changing costs.
Maintaining lifestyle and wellbeing
The settled retirement phase often focuses on maintaining an enjoyable lifestyle while safeguarding financial security.
Many retirees continue to engage in hobbies, community groups, volunteering and family activities. These pursuits contribute significantly to wellbeing and should remain part of retirement budgeting.
A successful retirement isn’t simply about cutting spending; it’s about maintaining a fulfilling and meaningful lifestyle at every stage of life.
Stage Three: Later-life retirement
New priorities emerge
As people enter their later years, spending patterns often change again. While spending on travel, entertainment and leisure activities may decline, healthcare and support-related costs can become increasingly important.
This stage is difficult to predict because health outcomes vary significantly between people. However, planning for the possibility of increased care needs can help reduce financial stress later in life.
Potential later-life expenses may include home adaptations, stairlifts and mobility aids, specialist medical equipment, additional healthcare services, in-home care support, residential care fees and assisted living arrangements.
While not everyone will require extensive care, it’s sensible to consider the potential financial implications.
Cost of care
Long-term care is among the most significant financial challenges facing retirees. Depending on individual circumstances, care costs can be substantial and may persist for several years.
Planning ahead can provide greater flexibility when making future care decisions and may help preserve assets for loved ones.
Some people avoid thinking about later-life care because it feels distant or uncomfortable. However, factoring in these potential costs when planning for retirement can provide valuable peace of mind.
Protecting independence
Financial planning for later-life retirement isn’t solely about covering care costs. It’s also about maintaining independence, dignity and choice.
Having enough financial resources can provide access to better care options, support services and living arrangements that align with your personal preferences.
Impact of inflation throughout retirement
One of the greatest threats to long-term financial security is inflation. While inflation may seem relatively modest in any given year, its cumulative impact over several decades can be substantial.
For example, a retirement income requirement of £30,000 today may need to be significantly higher in 20 or 30 years’ time simply to maintain the same standard of living.
Inflation can affect food and household expenses, energy costs, insurance premiums, travel costs, healthcare services and care-related expenses.
Retirement planning should therefore focus not only on generating income today but also on preserving purchasing power in the future. This often requires a balance between generating income and maintaining exposure to investments with long-term growth potential.
Expect the unexpected
No retirement plan is complete without providing for unforeseen events. Life rarely unfolds as planned, and retirement is no exception.
Unexpected expenses may arise from family emergencies, property repairs, vehicle replacement, health-related costs, changes in personal circumstances, or financial assistance for children or grandchildren.
While it’s impossible to anticipate every eventuality, maintaining an emergency reserve can provide valuable financial resilience. A contingency fund can help cover unexpected costs without disrupting your long-term retirement strategy or forcing you to make unplanned withdrawals from your investments.
Creating a realistic retirement budget
Understanding how spending changes throughout retirement enables more accurate financial planning. Rather than assuming a single level of spending, consider how your needs and priorities may evolve over time.
A practical approach is to think about spending in three categories:
- Essential spending, which covers the costs required to maintain your basic standard of living, including housing, utilities, food and insurance.
- Lifestyle spending, which includes discretionary expenditure that enhances your quality of life, such as holidays, hobbies, leisure activities and entertainment.
- Contingency spending, which is money set aside for unexpected events, emergencies and future care needs.
This framework provides a clearer picture of your income needs and helps identify potential shortfalls before they become problematic.
Porta’s Take
Ultimately, retirement planning isn’t about accumulating the largest pension pot. It’s about ensuring your financial resources support the lifestyle you want at every stage of retirement.
By understanding how spending changes from active retirement through to later life, you can create a more realistic and resilient financial plan.
The most successful retirement strategies recognise that needs and priorities evolve over time. By planning for these changes in advance, you can enjoy greater confidence, flexibility and peace of mind throughout your retirement.
A realistic retirement budget provides the foundation for every decision that follows, helping to transform retirement aspirations into achievable long-term goals.
Important information. This article provides general information only and does not constitute personal financial advice. The information is based on our understanding of current regulations, which may change in future. Decisions about your finances should always be made based on your individual circumstances. If you’re unsure about the suitability of any course of action, you should seek regulated financial advice. The Financial Conduct Authority does not regulate tax planning, estate planning, trusts or wills. The value of your investments can go down as well as up, so you could get back less than you invested.
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