Have you considered how your spending might change over the course of your retirement? Typically, retirement follows a U-shaped spending curve, but many people don’t tend to plan for this. We explain the concept and the importance of financial planning to ensure financial resilience later in life.
Retirement planning for financial resilience in later life
Financial resilience in retirement is a key goal for most people. As lifespans lengthen and a pension crisis looms, it is becoming increasingly important for individuals to take control of their own retirement planning. It is the only way to ensure that your standard of living is maintained over the course of a retirement that could last decades. Remaining resilient enough to withstand unexpected outgoings and shocks takes work and now is the time to do it.
A key finding from the Age UK ‘Financial Resilience in later life’ report was that ‘whilst retirement may follow a U-shaped spending curve, individuals don’t tend to plan for it’.
An understanding of what you may need to spend at different stages of retirement can help you prepare for, and thrive in, retirement. This is where an awareness of the U-shaped spending curve can be useful.
What is the U-shaped retirement spending curve?
The U-shaped retirement curve is a concept used in financial planning to depict the typical pattern of retirement expenses and lifestyle satisfaction when people stop working. The curve resembles the letter ‘U’ when plotted on a graph, hence the name.
The typical retirement can be broken down into three phases:
- Early retirement
This period is represented by the start of the U and is sometimes called the active phase. At this stage of early retirement, retirees tend to have higher spending and activity levels. Often, they will travel and socialise extensively and indulge in sometimes costly hobbies and leisure activities that they did not have the time to do while working. There may also be an uptick in expenditure on home improvements as individuals spend more time at home. In tandem, healthcare expenses often begin to rise as bodies age, requiring more medical attention.
- Mid-retirement
During this transitional period, which represents the bottom of the U-shaped curve, there is often a dip in both activity levels and spending. The home improvements are completed, items have been ticked off the bucket list and healthcare costs may stabilise.
- Late retirement
As retirees enter the later years of retirement, the curve starts to rise again. This is often called the passive phase as activity and ability lessen. Health-related expenses tend to increase as individuals age and may require more medical care, assistance, or long-term care. These expenses could include medical treatments, home healthcare, assisted living, or nursing homes.
Why the U-shaped curve is important for financial planning
Understanding this typical spending trajectory helps us see how financial needs change throughout retirement.
A sound financial plan should take into account changing spending patterns to ensure that retirees have sufficient funds to cover their needs and desires throughout their retirement journey.
Of course, everyone’s financial journey is different, and some people are lucky enough not to need expensive care as they age, which may well change the shape of the curve. In this case, the amount required to live on in retirement tends to decline over time.
The state of your health is one of several unknown variables that make it difficult to plan for retirement.
Retirement planning: take expert advice for peace of mind
That’s why it is important to take professional advice from a financial adviser who can discuss your retirement planning with you and use cash-flow forecasting to plot a typical U-shaped retirement curve and compare it to alternative scenarios.
Infinity’s advisers across Asia have the knowledge and experience to enable you to make informed decisions about your retirement savings and investments and ensure that whatever happens during your retirement, you won’t run out of money.
If you’d like to build financial resilience throughout your life and gain peace of mind about your retirement, why not make an appointment to talk to one of our retirement planning experts today?
A leading provider of expat financial services and wealth management services across Asia.
