Retirement Benefits

How to Prepare for the Early Retirement ‘Spending Surge’

Leading up to and just after retirement, you may spend more money than you think. In the two years before and the three years after the retirement transition period, household spending tends to peak, then decline during later retirement years, according to a study by J.P. Morgan Asset Management.

Many people believe they’ll immediately spend less in their retirement years. Over time, that tends to be true. But around the transition to retirement, average spending actually increases. The study analyzed the spending patterns of approximately 5 million households.

One to two years before retirement, a household’s spending increased before declining over the following two to three years.

Here are some possible spending changes around retirement, and how to plan for your own expenses.

Common Expenses Around Retirement

Although spending tends to level off after the first few years of retirement, early retirees who are younger, healthy, and eager to try new activities sometimes spend more than they anticipate. Keep an eye on some typical expenditures:

  • Travel: Some retirees plan big trips or hit the road after retiring, an increase to their typical travel budget.
  • Housing: Tackling that home renovation you didn’t have time for when working, or even relocating to a new place, costs money.
  • Lifestyle changes: While the cost of commuting to work decreases, social engagements, eating out, and other entertainment may increase spending.

Plan for a Change in Spending

Average U.S. expenditures decrease after age 55, according to the Bureau of Labor Statistics. After retirement, you won’t be making regular retirement account contributions, for example, or deducting certain taxes from your paycheck.

Experts say you’ll need 70-85% of your working income to maintain your standard of living into retirement.

But while you may spend less on average throughout your entire retirement, in your early retirement years, you may spend as much or even more than you did while you worked, depending on your lifestyle.

Consider your desired retirement lifestyle and project how much that lifestyle will cost. Then compare the lifestyle or the cost with your projected retirement income. Sources of income may include:

  • Your CalPERS pension
  • Deferred compensation, such as a 401(k) or 457 plan
  • Social Security
  • Other savings and investments

Other factors such as taxes, inflation, health care costs, and estate planning may need your consideration, as well.

For more tips, tune in to our Planning Your Financial Future video series: