Building a retirement spending plan

"How much can I spend?" is the question every retiree asks. The answer most advisors give — some variation of the 4% rule — answers the wrong question. The real question is: "What can I spend on, and when does the spending plan change?"

Retirement is not one 30-year block. It's three distinct phases with very different spending patterns.

The three phases of retirement spending

Phase 1: The Go-Go years (ages 65–75)

You're healthy, energetic, and finally free. Travel spending peaks. You take the trips you postponed, renovate the house, help a grandchild with college, maybe buy a boat. Spending in this phase is typically 100–110% of pre-retirement levels — sometimes more.

Phase 2: The Slow-Go years (ages 75–85)

Activity slows naturally. You travel less, drive less, eat out less. Spending drops 15–25% from the Go-Go years. Many retirees in this phase discover they're spending less than they expected and begin to accumulate savings again.

Phase 3: The No-Go years (ages 85+)

Daily activity is minimal, but healthcare costs can spike dramatically. Long-term care — whether in-home aides, assisted living, or skilled nursing — can cost $50,000–$150,000 per year. Not every retiree faces these costs, but those who do can burn through savings rapidly.

This "spending smile" — high, low, high — means a flat withdrawal rate misses reality. A good plan front-loads spending permission in the healthy years when you'll enjoy it most, reserves for healthcare in the late years, and recognizes the natural dip in between.

Essential vs. discretionary spending

The most important budgeting distinction in retirement isn't by category — it's by flexibility.

Essential expenses are non-negotiable:

• Housing (mortgage/rent, property tax, maintenance)
• Food and household basics
• Healthcare premiums and out-of-pocket costs
• Insurance (Medicare supplement, auto, home)
• Taxes

Discretionary expenses can be adjusted:

• Travel and vacations
• Dining out and entertainment
• Gifts and charitable giving
• Hobbies and club memberships
• Home improvements

The rule: essential expenses should be fully covered by guaranteed income — Social Security, pensions, annuity payments. If your essentials cost $50,000/yr and your guaranteed income is $55,000/yr, you can weather any market downturn without lifestyle disruption. Discretionary spending comes from the portfolio, and you flex it based on market conditions — spend more in good years, pull back in down years.

The bucket strategy

The bucket approach divides your portfolio into three segments based on when the money will be spent:

Bucket 1 — Cash (1–2 years of spending) High-yield savings, money market, short-term CDs. This is your paycheck replacement. You withdraw from here monthly. It never goes down in value.

Bucket 2 — Bonds (3–7 years of spending) Short-to-intermediate-term bond funds. When Bucket 1 gets low, you replenish it from Bucket 2. This buffer means you never touch stocks during a downturn.

Bucket 3 — Stocks (8+ years of spending) Broadly diversified equity index funds. This grows over time and eventually replenishes Bucket 2. Because you won't need this money for 8+ years, you can ride out any market crash.

The beauty of the bucket strategy is psychological as much as financial: knowing you have 2–3 years of cash and bonds gives you the courage to stay invested in stocks during a downturn. The worst thing a retiree can do is sell stocks after a crash to fund current spending — buckets prevent that.

What this means for the Hendersons

David and Linda want $80,000/yr after-tax. Their essential expenses might be $50,000 (housing, food, healthcare, insurance, taxes). If Social Security covers $55,000, essentials are handled by guaranteed income alone. The remaining $25,000–$30,000 in discretionary spending (travel, grandchildren, dining) comes from the portfolio. At $1.4M, they can comfortably bucket: $80K in cash (Bucket 1, ~2 years of discretionary), $300K in bonds (Bucket 2, ~7 years), and the rest in equities (Bucket 3). In the Go-Go years, they should spend on those travel plans — the Slow-Go years will naturally reduce spending, and the plan accounts for it.

What this means for Jordan

Jordan is decades from retirement spending, but the planning framework matters now. The "downshift at 50" goal means Jordan will face a modified version of this challenge 16 years from now — covering expenses without a full salary, likely without Social Security for another 12 years. Jordan's plan should think of the 50–62 period as a pre-retirement "bridge" requiring its own bucket strategy: enough in taxable and Roth to cover 12 years of reduced expenses without touching the 401(k).

Key takeaways

1. Retirement spending follows a "smile" pattern — high in active early years, lower in middle years, potentially high again for late-life healthcare.
2. Essential expenses should be covered by guaranteed income (Social Security, pensions). Discretionary spending can flex with market conditions.
3. The bucket strategy (cash → bonds → stocks) ensures you never sell equities during a market downturn.
4. Most retirees underspend in their healthy years. A good plan gives permission to spend when you're most able to enjoy it.
5. The spending plan should be revisited annually — not set once and forgotten.

Glossary

• Spending smile — The observed pattern of retirement spending: high early, low middle, high late — forming a U-shape or "smile" when graphed.
• Go-Go years — The active early phase of retirement (roughly 65–75) characterized by peak travel and lifestyle spending.
• Slow-Go years — The middle phase (75–85) when activity naturally declines and spending typically drops.
• No-Go years — The late phase (85+) when mobility is limited and healthcare costs may spike.
• Bucket strategy — A portfolio segmentation approach: near-term spending in cash, medium-term in bonds, long-term in stocks.
• Essential expenses — Non-negotiable costs (housing, food, healthcare, insurance) that must be covered regardless of market conditions.
• Discretionary expenses — Adjustable spending (travel, entertainment, gifts) that can flex based on portfolio performance and market conditions.