How the Retirement ‘Spending Smile’ Concept Can Help You Plan Your Future
Written by
Brooke Barley
Edited by
Zuri Anderson
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If you’re trying to strategically plan your retirement, you might have heard of the “Spending Smile analogy. What it breaks down to is that spending will usually decrease at the beginning of retirement, then stay the same for a time before going up due to medical expenses at the end of life, with this trend resembling the shape of a smile.
This can be a useful tool to plan out retirement spending. Here’s how to use the Spending Smile method to your advantage.
Focus Most on Planning for the First and Last Phases
Pedro M. Silva, principal partner at Apex Investment Group, said that he advises clients to spend less time planning for that “dip” in the smile, and more time accounting for the two higher ends.
“In the first phase, we encourage clients to spend their money, enjoy it, travel and spend time with people they care about doing things they love while they are healthy enough to do so,” he explained. “It is hard to imagine that one day poor health will prevent you from many of those activities, but experience tells us it will.”
Think of Long-Term Strategies
To make sure you have enough money on hand for end-of-life expenses, Silva recommended looking into methods that will have money available decades after your first day of retirement.
“If we have a 20-year window to deliver future dollars, we can leverage deferred annuities, life insurance policies with long-term care riders, and use general estate planning concepts to protect client assets for future generations,” he added.
Remember Inflation
The Spending Smile is a good guideline, but experts caution that it can’t predict global economic trends.
Mark A. Wingo, president and CEO of New Beginning Financial Group, LLC, said those looking to retire soon should adopt a strategy “that accounts for every penny coming in and going out and paying attention to the retirement silent killer, inflation. Inflation can cause what may seem as fixed, normal expenses, more expensive if you are not prepared with accurate budgeting.”
Eliminate Debt
Wingo cautioned that the Spending Smile is something to think about after debt is paid.
“It’s important that retirees are debt free as they enter these years, or have a plan to eliminate their debt,” he said. “Debt elimination is a retirement strategy that will give retirees the capital needed to maintain through the middle retirement years, and into the late retirement years without any loss of momentum due to unexpected financial uncertainties.”
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