What You Need to Know about the 4 Financial Stages of Retirement
Updated: Aug 30, 2021
Most of the general information you’ll find on retirement planning treats retirement as if it were a single, unchanging phase that begins when you stop working and lasts for the rest of your life. However, if you take a closer look, you’ll find that retirement consists of several distinct stages, each of which involves different expenses and consequently requires a different approach to budgeting.
What this means for prospective retirees is that you shouldn’t expect a one-size-fits-all retirement plan to adequately meet your changing needs throughout the whole of your retirement. Instead, to ensure you’re making the most of your retirement savings, it’s a smart idea to review your finances as you enter each new stage of retirement, understand what to expect from the upcoming stage, and adjust your budget accordingly.
Read on to learn more about the four financial stages of retirement (as defined by Investopedia), and to find out what financial steps you should be taking at each stage.
Stage 1: Pre-retirement (approximate age: 50-62)
What you need to know—The decade or so before you stop working is known as pre-retirement or, sometimes, peri-retirement. In this stage, retirement gradually shifts from a far-off, theoretical event to a reality that is going to happen sooner rather than later. For many workers, this stage is all about clarity—i.e., getting a picture of how much you will have in savings, what your retirement income and expenses will be, and what you plan to do with your days when you’re no longer working. Note that although 62 is designated as the end of this period (62 being the earliest age at which you can qualify for Social Security payments), you might choose to retire earlier or later, depending on your circumstances.
What you need to do—The most important thing you need to do during pre-retirement is take stock of all your assets and liabilities and see if and where there are gaps that need to be bridged. Make sure you understand the details of your pension and Social Security benefits, review the balance of retirement plans such as a 401(k) or an IRA, and ensure you have a plan for paying off any money you still owe on a home or car. If things seem tighter than you’d like, take another look at your monthly expenses and see if any costs could be trimmed before they start cutting into your retirement budget.
Stage 2: Early retirement (approximate age: 62-70)
What you need to know—This is the retirement stage in which you’ll see the biggest changes to your budget as you transition from earning a regular paycheck to receiving Social Security benefits and payments from pension and other retirement plans. Many retirees also find that their expenses can be quite high during this stage as they pursue long-cherished (and costly) dreams such as taking extended vacations, purchasing a holiday home, or even going back to school.
What you need to do—As you adjust to this new stage of retirement, the most important thing to do is stick to the budget you made during the pre-retirement phase. Try not to go overboard when it comes to expenses you haven’t planned for. Remember: if all goes well, at this point you still have many more years of retirement left to finance. You’ll also need to make some decisions about health insurance, such as replacing any employer-sponsored health plans, and when you want to start claiming your Social Security benefits.
Stage 3: Middle retirement (approximate age: 70-80)
What you need to know—At age 70, there is no longer a financial incentive for delaying Social Security claims; likewise, certain types of retirement accounts will require you to start taking minimum distributions at age 72. If you’ve held off on claiming these benefits until now, therefore, you may find that your income grows during middle retirement. Many retirees also find that their discretionary expenses decrease during this stage; for example, you may find you’re not wanting to travel quite as much as you did during early retirement.
What you need to do—Now that you’re receiving Social Security and retirement plan payments, it’s a good time to revisit your asset allocation to make sure that your savings are still working hard for you. Another important financial step to take during this stage is reviewing and updating your will or estate plan. It’s not always easy to plan for the end of your life, but it’s better to take care of this sooner rather than later.
Stage 4: Late retirement (approximate age: 80 and up)
What you need to know—For most retirees, the No. 1 expense during this stage will be health care. Depending on your situation, you could find your costs increasing (for example, if you need to hire a home health aide or move to an assisted living facility) or you could find them remaining more or less the same as in middle retirement.
What you need to do—With at least several years, possibly even decades, of retirement under your belt, now is the time to reassess your nest egg and make sure you’re withdrawing money at a rate that’s appropriate for your ongoing situation. Be sure to consider not only the expenses you’re anticipating during your lifetime but also what you might want to leave to others.