Why the First Decade of Retirement Is the Most Important

Some people assume that once they’re done working, they don’t have to worry about managing their finances as carefully in retirement. But retirement, like any stage in life, is more complex than that. New data are indicating what many financial professionals already knew: The first decade of retirement is crucial. But how do you get it right?

Why the First Decade Is So Important

Studies from the Bureau of Labor Statistics show that people ages 65-74 spend 37% more than people ages 75 and older. Why? The first decade after retirement is likely filled with travel, hobbies and other money-consuming adventures. Even after including rising healthcare costs in later years, those younger than 75 still spend more. “It is not realistic for most people to assume that they will magically begin to spend less in retirement. However, it is quite common for the elderly to slow down and spend less,” says James Twining, founder of Financial Plan, Inc. in Bellingham, Wash.

If you’ve been counting the days until you can sit on the beach, it may be tempting to let go of your frugal habits. While you should enjoy what you’ve saved for, you also need to realize that you’re living on a fixed income. Talk to a financial advisor about how much you should live on each year and stick to a budget. That way, you can spend money on the things that matter without worrying about running dry in your 80s. (For more, see: 5 Signs You're Spending Too Much in Retirement.)

One of the best ways you can position yourself in the first decade of retirement is by delaying Social Security. “If you postpone taking Social Security until age 70, your benefit increases approximately 8% a year,” says Peter J. Creedon, CEO of Crystal Brook Advisors in New York City. If you have a pension or other retirement account you can use until you turn 70, postponing will provide a huge boost toward your nest egg. Having a guaranteed form of income like Social Security can be a big boon – especially if you end up getting more than you counted on.

If you don’t have the means to delay Social Security until 70, consider working a bit longer or amping up your retirement contributions. If you’re married, one of you can wait until 70 while the other takes Social Security earlier. (For more, see: Tips on Delaying Social Security Benefits.)

How to Get It Right

One of the best ways you can ensure a healthy retirement is by taking a more conservative withdrawal rate from your savings. While traditional advice recommends that you take 4% from your retirement funds, using only 3% can protect your nest egg even more.

Another way to make your first decade a success is to be more aggressive in your investments. While retirees are generally told not to hold money in stocks, opting out might cause them to lose out on big gains. Holding 20% in stock at the outset and buying more stocks later is one strategy for taking advantage of low prices in a bear market. Even if stock prices are high, your odds are still better than if you had remained more conservative. (For more, see: 5 Ways to Stretch Your Retirement Budget.)

Planning for healthcare expenses is another way you can preserve your savings. The average retiree spends $240,000 on healthcare. If you plan for these costs, you won’t have to worry about recovering from an illness while fretting over paying your medical bills. “Aside from traditional methods such as a health savings account (HSA) or long-term care insurance, different types of life insurance policies, life insurance settlements, specially designed annuities and government programs are available to plan for healthcare expenses,” says financial planner Carlos Dias Jr., founder of Excel Tax & Wealth Group in Lake Mary, Fla.

The Bottom Line

While it’s tempting to think of retirement as the time where we cash in on savings and enjoy stress-free years of leisure, it’s just not that simple. Ample preparation mixed with active monitoring during retirement is the only way to be sure you can sail off into your later years worry free. (For more, see: Stretch Your Savings By Working into Your 70s.)