When workers think about what retirement will be like, they often imagine it as a single monolithic event -- as if they can pursue their favorite activities every day until their last. But in reality, retirement is a three-stage event, and for most retirees, each stage is considerably different. Knowing how your expenses will likely change over time will help ensure that your money lasts as long as you do.

The first decade: retired life begins

During the first decade or so, new retirees are stretching their wings and learning just what this retirement thing is really like. Because new retirees are relatively young, they're often in good health and have a relatively high energy level, so they're ready and eager to embark on adventures like world travel. However, our natural desire to live it up after decades of work means that this first decade is typically an expensive one for retirees. That's why it's important for retirees to build significant flexibility into their initial budget, perhaps planning to spend 10% to 20% more per year during the first 10 or so years of retirement. For example, if you think you'll need $50,000 in annual income in retirement, aim instead for $55,000 or $60,000 per year. With this approach, if it turns out you were optimistic about your income needs, you'll still have enough to get by.

Part of the challenge of this early retirement period is that while you need a relatively large income, you also want to keep your retirement account withdrawals fairly low. After all, the money in those accounts needs to last you for the next 20 to 30 years; if you deplete them too much early on, you'll be sure to run out of money down the road. Assuming your investments earn average returns (say, 7% per year if you're invested mostly in stocks), it's best to limit your withdrawals to 3% to 3-1/2% of the entire balance per year for the first five to 10 years of retirement. If your returns are particularly good during the year, you can take a little more. On the other hand, if your returns are bad or even negative, keep your withdrawals as small as you can possibly manage.

Calendar with 'time to retire' circled

Image source: Getty Images.

The second decade: settling in

Once the first decade of retirement has passed, you've had time to get used to this whole retirement thing and have likely sated your taste for adventure. You may also begin to experience some chronic health issues that reduce your energy or even your mobility. Thus retirees in their second decade tend to live more quietly. This is a time when many retirees choose to focus on family activities. Some feel like their current home is "more house than they need," inspiring them to downsize and perhaps to move closer to family or friends.

Spending typically drops during this phase of retirement. Americans aged 75 and older spend 23% less on average than those aged 65 to 74, according to a Bureau of Labor Statistics study. That's partly because elderly Americans travel less -- the BLS says the 75-and-up crowd spends 35% less on transportation than the 65-to-74 group -- and downsizing your living situation also helps to cut expenses. At this point, you can also bump your retirement account withdrawals, raising the percentage to 4% to 5% per year depending on your returns. On the other hand, medical expenses are likely to be somewhat higher than they were during the first decade. If your healthcare expenses are much higher than they were in the previous decade, consider switching to a different Medicare plan -- a plan with higher premiums but better coverage might end up saving you money at this point.

The third decade: winding down

By this time you're in your 80s or 90s and probably have much less energy than you did at the beginning of retirement. Many retirees at this stage move to assisted-living facilities or require other types of long-term care. It's best to explore different long-term care options before you actually need them so that you can find the best caretaker or facility for you. It's also a good idea to arrange for a power of attorney with a trusted advisor or family member so that if you become unable to make decisions for yourself, someone with your best interests at heart will make them for you.

Most of your living expenses will drop still further at this point, but your medical expenses will likely rise, especially if you're getting substantial long-term care. Unless everyone in your family lives past 100, you're probably reaching the end of your life and can thus increase your retirement plan withdrawals to 8%, 10%, or even more depending on your returns. That said, if you want to preserve capital for your heirs, then you may choose to cut back on your withdrawals.

Planning for the three stages

Since your health and energy levels will be highest at the beginning, it's wise to pursue your highest-activity desires during your first decade of retirement. Just keep an eye on your budget so you don't overspend and cause problems for yourself later. During the middle and later stages of retirement, many retirees experience feelings of isolation -- so this is a good time to be close to family and friends. And remember: You worked hard for decades to be able to enjoy a pleasant and comfortable retirement. This part of your life should be all about you, so put your time and energy into enjoying yourself!

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