Retirement spending is a U-shaped curve. Here’s how to maximize it

Financial planners talk about three phases in retirement: the go-go years, the slow-go years and the no-go years. Expenses tend to be highest at the beginning and end of retirement — creating a U-shape. But many people think of retirement spending as a constant variable.

“As they enter retirement, especially early in retirement, they see themselves spending all sorts of money and then they can’t envision themselves cutting back,” says Jonathan Swanburg, a certified financial planner in Houston.

But the big trips and experiences you’re planning for your golden years are often one-time things, and as you get older, you may naturally travel and spend less. Then at the end of life, there’s an uptick in spending on things like long-term care.

“It kind of looks like a smile when you look at all the numbers,” says Michelle Crumm, a CFP in Ann Arbor, Michigan.

Here’s how to lean into this spending pattern.

Get clear on your goals

A U-shaped retirement plan works for many people — but not all. You and your financial professional should discuss what you hope to get out of your retirement.

“If it’s a couple, you’ve got to make sure they’re on the same page,” Crumm says. Some people, she says, want to vacation up to the last day of their lives, buy new houses or always give money away. “They’re not good candidates for a smile strategy.”

Delay social security

The longer you wait to claim Social Security, the higher your payments will be, giving you more income to work with. You’ll have to pull disproportionately from your retirement savings to start, but in later years, you’ll be able to pull more from Social Security.

“The other half of the ‘U’ is funded much more by Social Security and less by your savings,” Crumm says.

If you don’t have the ability to wait, you may be on a more linear retirement path. Crumm says she’d almost never recommend taking Social Security at 62. “But if there are a ton of health care issues or a lot of other things going on, they’re not on a smile spending strategy,” she says. “They’re more on a survival strategy.”

Keep fixed expenses low

The more you can simplify your balance sheet — pay off your mortgage, get rid of credit card debt — the more freedom you’ll have to adapt your retirement spending as needed. If the stock market takes a dive, you can drop discretionary expenses so you withdraw less from your savings that year.

“It’s figuring out where we can cut back in the event that things do go haywire,” Swanburg says.

For retirees with larger fixed expenses or who are supporting their children, it may not be possible to budget for swanky trips in early retirement years. “Maybe we do not have those big early expenses because we don’t have a lot of levers to pull in the event they need to cut back,” Swanburg says.

Make plans for long-term care

READ: Saving for retirement and helping family at the same time

People spend more in late life on health care and long-term care, creating the back end of the U-shape. Long-term care insurance (or a product like it) can make a big difference here.

Hybrid policies that combine permanent life insurance with a long-term care rider have the advantage of paying out a benefit to someone no matter what happens, but they can be expensive.

If clients don’t have long-term care insurance, “We usually recommend holding back $300,000 because that’s, on average, what people are going to need for long-term care,” Crumm says.

If you have equity in your home, you may be able to use that to cover end-of-life expenses. “In most situations, you can take that home equity and repurpose it for the extra expenses related to long-term care,” says Joel Cundick, a CFP in McLean, Virginia.

Manage income strategically

The way you withdraw income — think taxable versus nontaxable accounts — affects everything from the taxes you pay to the price of health care. (Medicare Parts B and D cost more for those with higher incomes.) You might benefit from converting some savings to a Roth IRA or offsetting capital gains by claiming losses. Working with an adviser on retirement income optimization can give you more flexibility when you need it.

“There are smart ways to take money out of the retirement plan, and there are smart ways to set yourself up for retirement income,” says Catherine Valega, a CFP in Winchester, Massachusetts. “Work with someone to make sure you are tax optimizing your financial life.”

This column was provided to The Associated Press by the personal finance website NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Kate Ashford is a columnist at NerdWallet. Email: [email protected]. Twitter: @kateashford.