Retirement is an elusive idea and means something different to everyone. When it comes to retirement planning, what is the word most associated with being prepared for retirement? Most people would say saving and, for the most part, they would be correct. During your working years, the mantra is save, save, save.

But what about spending – both in our working years and during retirement? How may spending be just as, or even more, important to saving in how prepared we are for retirement?

Accumulation Years

There are many varying opinions on how much needs to be saved for retirement. For example, one approach says you should save 10% of your salary in your 20s, or considerably more if you begin saving later in your career. The problem with these general rules is how they tend to be vague. There isn’t an answer that will be a perfect fit for everyone, and simple observations need to be further explored to include both saving and spending.

Most people starting their careers just out of high school or college typically begin at a lower income that increases over time as they advance. For most, the increase in income also comes with an increase in lifestyle. The 10% that was saved during their 20s or 30s may not be enough to replace the increased lifestyle in the years leading up to retirement. This is why there also needs to be a focus on spending during your accumulation years.

As income increases, we need to be careful not to increase our lifestyle at the same pace. This isn’t to say we should not enjoy the fruits of our labor, but if our saving fails to keep pace with our spending, then retirement security will continue to elude us.

Retirement Years

How Does Spending Change in Retirement?

Many people assume spending will decrease when our working years come to an end. The house is paid off, the kids are out of the house, maybe you only need one car now that the commute is behind you. It makes some sense, right? However, while spending may go down in some areas, it will go up in others as we enter the latter part of retirement.

At OPERS, we like to talk about retirement in three distinct phases:

Early Retirement – The “go-go” years of early retirement find retirees very active, and discretionary spending increases with the pursuit of things put off during our working years (hobbies, travel, etc.).

Mid Retirement – In the “slow-go” years of mid retirement, retirees are still very active, but discretionary spending starts to decrease as the big toys and vacations are out of the way.

Late Retirement – In the “no-go” years of late retirement, retirees are feeling the effects of age and declining health. The increase in healthcare spending often exceeds the decline in discretionary spending.

At retirement, we turn our attention from accumulating retirement savings to how we will spend that very precious nest egg. How long the savings will last has everything to do with how much and how quickly we take distributions from our various retirement income sources. Here are some of the major factors to consider:

  • Inflation (longevity)  The rising cost of goods and services over time will eat away at our purchasing power throughout retirement. Inflation will work against us much like compound interest works for us during the accumulation years. As we enjoy longer retirements (maybe 30-35 years), the compounding effects of inflation become of increasing concern.  
  • Withdrawal Rates  What is an appropriate percentage to withdraw from our managed assets (e.g. SoonerSave, 457 plans, IRAs, etc.) each year? A common benchmark for retirement planning is to withdraw no more than 4.5 percent of savings every year, adjusted for inflation, for your nest egg to last about 30 years.

    This is a good starting point, but not a perfect fit for everyone. What happens if you live longer than 30 years in retirement, or your managed assets are not diversfied in such a way to keep up with inflation? The rule is based on an assumption that you continue to invest in a balanced portfolio and the investment returns will support a 4.5 percent withdrawal rate. If investment returns do not, then spending has to become more conservative.  

  • Required Minimum Distributions  Another consideration is what is referred to as the Required Minimum Distribution (RMD). The minimum distribution is the minimum amount retirees must take out of tax-deferred retirement plans (e.g. SoonerSave, 457 plans, IRAs) starting the year they turn 70 ½, the age at which the IRS wants to begin taxing those deferred savings vehicles. For more information on RMDs, visit  
  • Budgets  Spending plans are a good idea at any age, but particularly important at retirement, since our spending decisions influence how long our retirement income will last. It is crucial to have a spending plan in place before retirement to ensure you avoid any unmanageable gaps between your income and expenses in retirement. The sooner those gaps are identified before retirement, the better prepared you will be to overcome or adjust to those gaps.

This article was first published in the Summer 2013 edition of the Retiring Right newsletter. Click here to view other newsletters. Not receiving your newsletter, update your address by completing the Change of Address form.

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