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Investing for a Lifetime: Managing Wealth for the "New Normal" by Richard C. Marston

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CHAPTER 17 Spending in Retirement

How much do you need to retire? That’s a very important question that every investor asks when retirement looms ahead. In Chapter 4, I suggested that the savings goal of many investors is to have enough money to keep the standard of living in retirement as high as it was during their working years. That’s a reasonable aim. Unfortunately, it may be not possible for many Americans. That’s particularly true of those Americans who do not have the defined benefit pensions so common to earlier retirees. Without the steady income provided by old-style corporate pensions or state and local pensions, many Americans may find their standard of living dropping sharply when they retire.

Isn’t it possible to live more cheaply in retirement? Some living expenses that we incur during our working years disappear in retirement. Those may include commuting expenses, meals, dry cleaning, and other expenses directly related to work. But, as Michael Stein (1998) recounts in his book, The Prosperous Retirement, retirees often find new ways to spend now that they have no work commitments. Many retirees, for example, want to take trips—trips that they have postponed during their working years.

Stein observes that retirees want to spend the most when they first retire. That’s because retirement often occurs in three stages:

  1. Active phase “go-go”
  2. Passive phase “slow-go”
  3. Final retirement phase “no-go”

Early in retirement, the retiree is often in good physical shape, ...

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