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Planning for Smart Retirement Spending

A man and woman with big smiles signing a document.

Much of retirement planning involves developing a strategy for investing your money for the future—but deciding how you'll spend that money is just as important.

Having a financial plan for life's next stage can help ensure you maintain (or even increase) your standard of living in the golden years. Below, we explore common retirement spending habits and discuss strategies for retirement planning.

How people typically spend money in retirement

Spending from one retiree to the next can vary, but looking at general retirement spending trends can give you a baseline of expenditures to budget for.

According to the Employee Benefit Research Institute (EBRI), the average retiree's most significant expense is housing, which takes up a third of their retirement income. Food costs clock in as the second largest expense.1 Meanwhile, healthcare costs generally climb with age.2

When projecting essential and non-essential costs, "the retirement smile" and "go-go, slow-go, and no-go" models are two popular spending habit trends you can reference.

The Retirement Smile Go-Go, Slow-Go, No-Go
According to research published by financial analyst David Blanchett, retirement spending decreases by about 1% per year despite inflation, but spending isn't consistent each year. When annual spending is charted, it creates a line that looks like a smile.3
  • Expenses are higher at the beginning of retirement likely due to leisure costs.
  • Expenses dip in the middle years.
  • Expenses rise again at the end of retirement likely due to healthcare costs.
The "go-go, slow-go, and no-go" theory, popularized by financial planner Michael K. Stein, further explains the typical retirement spending by age.4
  • The "go, go" years are when you might travel more and get involved in more activities.
  • The "slow-go" years are when you start to slow down.
  • The "no-go" years are when you slow down significantly, possibly due to decreased mobility.

With these guidelines in mind, you might budget more for leisure, travel, and activities at the beginning of retirement and more for medical and long-term care later in life.

A word on healthcare spending in retirement

Healthcare is an area that deserves special attention when budgeting your cash because it can be costly. A study by the Center for Retirement Research at Boston College found the healthcare costs for the average 65-year-old household are $310,000 over their remaining lifetime (excluding premiums), and 21.6% is typically paid out of pocket.

While Medicare and other insurance may cover a large part of the cost, note that coverage may be limited for long-term care and assisted living.5 And since long-term care and nursing home costs can be high, budgeting for them is a way to make sure you’re able to spend your final years in the type of facility that has the care, amenities, and features you desire.

A look at the 4% spending rule

When deciding how much cash to draw each year, the "4% rule" guideline is a cornerstone of financial planning. The rule states that it's safe to spend 4% of your total nest egg in the first year of retirement. From there, you should adjust annual withdrawals based on inflation.

The guideline was coined by financial advisor William Bengen in a 1994 retirement study that considers a portfolio of 50% equity and 50% bonds as the optimal asset allocation. According to Bengen, the 4% safe withdrawal rate makes retirement savings last for 30 years a majority of the time.6

However, like most financial rules of thumb, the 4% rule might not work for every scenario. Your portfolio may not mimic the optimal asset mix, and historical returns considered in the model aren't a guaranteed indicator of future returns.

Thinking beyond the 4% rule

Ultimately, everyone's spending strategy should be individualized based on priorities and risk tolerance. For example, a retiree who sees passing down wealth to heirs as a high priority might have a more reserved spending rate and aggressive investment strategy than a retiree without heirs who intends on spending down retirement savings while living.

When deciding your spending rate, consider the following:

  • Your life expectancy
  • When you plan to retire
  • Where you plan to retire and the cost of living in that locale
  • How pensions and Social Security will supplement your income
  • What assets you're planning to leave to heirs

With the help of a financial plan, you can make adjustments to the 4% rule to tailor your investing and spending to a level that makes sense for you. As a Santander® Private Client, you have access to a team of Financial Advisors with Santander Investment Services that can help you leverage a complimentary financial plan to help fine-tune your retirement approach.

Building confidence in money’s longevity despite inflation

After a lifetime of working to build wealth, you deserve to buy that dream car or vacation home. However, big purchases may require strategic planning as we deal with inflation.

The U.S. inflation rate as of May 2023 is 4% over the last year, and meanwhile, the markets have seen major volatility. Inflation that outpaces returns could truncate purchasing power.7 In an environment where prices are rising, diversifying your portfolio with real estate, commodities, and government-backed bonds could provide a hedge against inflation.

In addition to making strategic investments, budgeting and thoughtful spending can help you avoid drawing down funds to a level that reduces your standard of living later in retirement.

Tactics for efficiently drawing money

When it's time to tap into savings, taking money from retirement accounts is similar to any other type of financial account. In many cases, you'll log into your investment, select the option to make a withdrawal, and choose the amount you'd like to take out.

For a 401(k) plan, you could choose to draw funds in a lump sum or in periodic installments. Below are some considerations to make before tapping into your nest egg:

  • Wait until your 59 ½ birthday. Drawing money from a retirement account before reaching 59 ½ could trigger a 10% tax penalty. If you retire early, drawing first from taxable accounts could minimize your tax liability.8
  • Make the most of passive income. Growing assets that generate passive income can minimize the amount you need to withdraw from accounts, preserving your wealth and giving it an opportunity to continue growing during your retirement years.
  • Be mindful of required distributions. While you can delay taking distributions from retirement savings, you can’t do it forever. You must make required minimum distributions (RMDs) from SEP, SIMPLE, and traditional IRAs and 401(k) plans at 73 years old to avoid an excise tax bill. (If you remain employed after age 73, and your plan allows, you can defer RMDs from workplace retirement plans until the year after you retire.) has an RMD calculator you can use to estimate what those minimum annual distributions might be.9

The importance of staying flexible

While planning is crucial, we live in a dynamic world where some events are beyond our control. In the last two years, we've watched how a pandemic, geopolitical turmoil, and central bank rate increases have had implications even for people with fully funded retirement accounts.

Personal events could also derail your plans. Perhaps you have to draw early from your retirement savings to cover a financial pitfall or emergency health expenses. Being flexible is crucial, and regularly revisiting your saving strategy with a relationship banker can help you identify the most efficient ways to invest and draw money to meet your most pressing needs.

The big picture

After a lifetime of saving, it might seem strange to think about pulling from your accounts, but the time will come when you'll be able to draw from your nest egg. Putting a sound retirement plan in place can help you confidently draw money and enjoy your wealth in retirement.

A Financial Advisor from Santander Investment Services can answer questions and review your portfolio, goals, and risk tolerance to advise you on the best way to manage your assets for retirement.

1 “2022 Spending in Retirement Survey: Understanding the Pandemic’s Impact,” Employee Benefit Research Institute

2 “How Much Do Retirees Spend on Uncertain Health Costs?” Center for Retirement Research of Boston College

3 “Exploring the Retirement Consumption Puzzle,” FPA

4 “The Myth of Steady Retirement Spending, and Why Reality May Cost Less,” The New York Times

5 "What's the Difference Between Home Health Care and Nursing Home Care?" eHealth

6 “What Is the 4% Rule for Withdrawals in Retirement and How Much Can You Spend?”,

7 "Consumer Price Index," U.S. Bureau of Labor Statistics

8 "Here's What People Should Know About Taking Early Withdrawals from Retirement Plans," IRS

9 "Retirement Topics — Required Minimum Distributions (RMDs)," IRS

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