Budgeting for the 4 Phases of Retirement

According to experts, individuals often go through four designated retirement phases. Within each phase, changing income and expenses require different budgeting approaches.

Although experts give these phases a variety of names and sometimes number them differently, here's how you can expect to budget based on a four-stage model.

Factors That Affect Your Retirement

How comfortable your retirement will be depends in part on your income stream. Retirement is vastly different for low-income earners than it is for people with high disposable income and affordable health care.

For Black U.S. residents and other marginalized groups, there may be a racial retirement gap as well, caused by the economic inequalities created through the race-related wage gap. Women, too, may face a retirement gap. According to the U.S. Government Accountability Office, women's retirement earnings are approximately 30% lower than men's. For some individuals, family obligations (caring for aging parents, children with special needs, etc.) can also affect retirement.

Despite these inequalities, retirement still tends to change by age and stage. Retirement lifestyles will likely vary based on race, socioeconomic status, and gender as mentioned above.

Pre-Retirement (Ages 50 to 62 or So)

Pre-retirement (sometimes referred to as "peri-retirement") is the decade or so leading up to retirement. You’re still working, but retirement is approaching and you’re finally getting a clear picture of what your nest egg (if you have one), income, and expenses will look like.

We put age 62 as the end of this period because it's the age when people first qualify for Social Security payments. Some people might retire at 55 or 60 while others keep working well past 70—or never retire at all. At this stage, it's key to assess your likely income and expenses after you exit the workforce.

Here are some questions to ask:

• What will you receive from a pension or Social Security?
• What are the balances in your retirement plans—such as 401(k)s, 403(b)s, or IRAs—and how much will you be able to withdraw each month?
• Will you have paid off your mortgage, and if not, how much do you still owe and for how long?

In your 50s and 60s, you may still have major expenses ahead, like putting kids through college, making a down payment on a new home, or paying for a wedding. You might want to trade your usual vacations for trips to places you’ve envisioned yourself living after you retire. 

You may be in a strong enough financial position to consider early retirement seriously. Your employer might downsize, and you might find yourself considering whether to accept a buyout—or being forced to accept one. This is an opportune time to create a succession plan if you run a family business. If you haven't reached your financial goals yet, it could be an excellent time to start saving more aggressively.

A 2023 study by Vanguard found the median defined contribution plan balance was $27,376. For many, this amount just simply isn't enough to retire on. By eliminating any wasteful spending, you can give your retirement budget some breathing room and make a game plan on how to generate income, like downsizing from your home or renting out a room, finding a part-time job, or simply staying put at the job you have for a few more years.

Early Period of Retirement (Ages 62 to 70)

Some of the most significant changes in your budget will occur when you first retire. You'll no longer receive a steady paycheck unless you have a pension. You'll need a plan to manage your income during retirement, and you'll need to decide when to start claiming Social Security benefits. You might also lose employer-sponsored health insurance, so make sure to plan how you, your spouse, and any dependents will get coverage if they are on your policy.

If you or your spouse won't be old enough to enroll in Medicare yet, you'll need to consider a private health insurance plan or buying a policy through the Affordable Care Act's Health Insurance Marketplace. If you have a low income and no nest egg for retirement, you should try to establish a way to supplement your Social Security income, like working part-time. Taking a part-time or seasonal job, starting a business that gives you flexibility in your hours, or even transitioning into a new career can provide increased stability.

If you are financially secure when you retire, spending your money on a lavish trip or buying a high-value item can be tempting. Still, it is essential to remember that your retirement dollars need to stretch—potentially for a long time. You may want to protect your retirement funds by balancing the more expensive activities you want to spend time and money on with inexpensive or free ones.

In addition, if you can afford it, this might be the time to move somewhere more desirable now that your job no longer ties you to a specific location. Moving could be a boon to your financial situation—or a major belt-tightening—depending on the cost of living where you currently reside versus where you're headed.

Middle Retirement (Ages 70 to 80)

During middle retirement, you'll likely be receiving Social Security benefits, as there is no financial incentive to delay past age 70. At age 73, you'll have to start taking required minimum distributions (RMDs) from certain types of retirement accounts: profit-sharing, 401(k), 403(b), 457(b), and Roth 401(k) plans, as well as most types of IRAs (but not Roth IRAs). This is a good time to revisit your asset allocation if you aren't in an investment that does this automatically, such as a target-date fund.

At this stage, you could see your expenses go down. You may want to travel less and stay home more, or your travel might be centered around less expensive trips to visit grandchildren and other friends or family. If you have children, they will hopefully no longer need to turn to you for money. Also, you may not need life insurance (or as much of it) anymore.

You may have created a will and estate plan when your children were younger because you wanted to make sure they were cared for if something happened to you. Now, you may want to revisit those plans and see if they still express your wishes. You might also want to give someone financial power of attorney that kicks in if you become unable to manage your money and establish a healthcare power of attorney if you need someone else to make your medical decisions.

If you find yourself in middle retirement without a retirement fund or pension, it is a good idea to find ways to save a little money every month. You can do so by learning about all tax credits, signing up for discounts, and finding ways to stay thrifty. For example, If you cannot afford Medicare's premiums and co-pays, it is worth investigating Medicare Savings Programs designed to help people with a low income. If you own your own home but can't afford to move, you could consider taking on a roommate or, if you have somewhere else to stay, renting your house out via a home-sharing platform. A part-time job can be a great way to supplement your Social Security income as well.

Late Retirement (80 and Up)

In late retirement, you will likely face increased healthcare costs because medical spending tends to be highest at that time of life. Medicare will cover many of your expenses, but you'll still have out-of-pocket costs for things, like co-payments and deductibles. Explore Medicare Savings Programs if you can't afford your premiums and co-pays.

You might have additional expenses in late retirement if you move to an independent or assisted living facility or if you need to move to a nursing home or hire a home health aide. Aside from a possible increase in health care costs, your other expenses could be similar in late retirement to what they were in middle retirement. If you cannot afford assistance, you may want to speak to a family member about potentially living with them.

At this stage, you may want to reassess your retirement savings and consider how adequate they are to see you through the rest of your life. If you're running low on cash and still live in your home, you could consider a reverse mortgage as a source of funds. Looking at what you have left, you'll need to think about what you want to spend during your lifetime and what you hope to leave to others, including any charitable bequests. 

The Bottom Line

Retirement is both an event and a process. Your benefits and savings may have to cover your expenses for three decades or more. The costs at each retirement stage are associated with how you choose to spend your time, where you decide to live, and how your health holds up. If you take these factors into account and consider how they may change throughout your retirement, you can budget accordingly.

If you have not saved enough for retirement, you are not alone. One in four Americans does not have adequate retirement savings. Low-wage jobs, pension loss, racial and gender-based wage gaps, and the high cost of health care in the U.S. are all factors that impact the ability to retire.