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The Retirement Mirage: Why Your Financial Plan Needs Two Phases — And How to Prepare for Both
Most retirement planning conversations begin with hopeful visions of long-delayed vacations, days filled with hobbies, and more time with family. The spreadsheets are clean, the math looks solid, and your financial advisor may tell you something reassuring like: “Spending typically declines with age.” This is, in part, true.
But like most comforting generalizations, it hides a much messier reality. In fact, your retirement expenses are not a smooth downward slope. They’re more like a two-act play: Act One features fun and freedom, and Act Two, if you’re lucky enough to live long enough, brings a dramatic plot twist—one involving health issues, long-term care, and a rapidly shrinking nest egg.
To build a retirement strategy that actually holds up under pressure, you need to understand two contrasting trends:
- General retirement planners model a gradual decline in spending as you age.
- Long-term care planners model a sharp increase in costs late in life.
- Reality contains both.
In other words, your retirement plan needs to anticipate two financial phases:
- Phase One: Declining discretionary spending (fun stuff).
- Phase Two: Increasing non-discretionary care costs (necessary and often costly).
Let’s unpack this and see what you should be doing now to prepare.
Phase One: The “Go-Go” Years and the Myth of Declining Spending
Retirement planners often reference what’s affectionately known as the “go-go years” — typically the first decade or so after retirement. During this period, retirees tend to spend more freely on travel, dining, hobbies, grandchildren, and other forms of discretionary joy. This is when the “every day is Saturday” vibe is strongest.
After this initial burst of activity, spending tends to slow down naturally:
- People become less mobile.
- Big-ticket travel loses its appeal.
- Hobbies and events give way to quieter routines.
This trend is real and often supported by consumer data. Households led by someone aged 75 or older spend, on average, about 20% less than those in their mid-60s. For this reason, many advisors model retirement spending as gradually decreasing — a neat, downward-sloping line on your Excel chart.
But here’s the twist: that line doesn’t tell the whole story.
Phase Two: The “No-Go” Years and the Long-Term Care Explosion
While general spending on fun may taper off, healthcare and long-term care costs can—and often do—skyrocket.
Here’s the stark truth:
- By age 80, the odds of needing help with activities of daily living (ADLs)—things like bathing, dressing, using the toilet, eating, and mobility—grow substantially.
- The U.S. Census Bureau expects the number of Americans over 85 to nearly double by 2035, and nearly triple by 2060.
- A recent CareScout study found that the monthly median cost of a private nursing home room in 2024 was $10,646. That’s not a typo.
- Costs for assisted living, homemaker services, and nursing home care all jumped around 10% in 2024 alone, well above the general inflation rate.
And here’s the kicker: Medicare does not cover long-term care beyond short-term rehab following hospitalization. Nearly half of Americans age 65 or older incorrectly believe it does. This misunderstanding leaves many retirees dangerously unprepared.
Your Real Retirement Has a Split Personality
You’re not planning for one retirement — you’re planning for two very different financial periods:
- Phase One: Early Retirement
- Focus: Discretionary spending
- Strategy: Flexible withdrawals, optimizing investment returns, and enjoying life
- Risk: Overspending too early or overestimating portfolio longevity
- Phase Two: Late Retirement
- Focus: Health care, long-term care, and essential living expenses
- Strategy: Protecting assets, planning for guaranteed income, and managing care needs
- Risk: Underestimating care needs and running out of money
Too many retirement plans model only Phase One and cross their fingers for Phase Two. This is why retirees often end up re-entering the workforce in their 70s, selling off assets in a panic, or becoming reliant on family members who are also financially strained.
So What Should You Actually Do?
Let’s get practical. Here’s how to build a retirement plan that can flex for both phases:
1.
Segment Your Spending Strategy
Break your retirement budget into three categories:
- Essential needs (housing, food, health insurance)
- Discretionary wants (travel, hobbies, entertainment)
- Potential care costs (assisted living, home care, nursing facilities)
This lets you match reliable income sources (Social Security, pensions, annuities) with essential needs, and use portfolio withdrawals for discretionary and care-related expenses.
2.
Model Dynamic Withdrawals — Not Flat Ones
Don’t assume you’ll withdraw 4% per year forever. That may have worked in theory during the ’90s, but we live in a world where markets are erratic and lifespans are longer.
Use a dynamic withdrawal strategy that lets you:
- Spend more in good market years
- Pull back in down markets
- Adjust based on personal needs and goals
A dynamic plan is the financial version of steering a car — it keeps you on the road even when the terrain changes.
3.
Set Aside a Long-Term Care Fund
Most retirees will need some form of care:
- 1 in 5 will need none
- 1 in 5 will need extensive care
- The rest will fall somewhere in between
Assume you’ll be one of the latter and plan accordingly.
Options include:
- Self-funding: Earmark a portion of your portfolio for future care.
- Long-term care insurance: Pricey but valuable if bought early enough.
- Hybrid life + long-term care policies: Offers some death benefit and care coverage.
- Medicaid planning: Involves restructuring assets to qualify without impoverishing yourself.
4.
Build in an Emergency Buffer
Withdrawals for care during bad market years can devastate your portfolio. Planners recommend moving one to two years of living expenses into a stable, liquid account, like a high-yield savings or money market fund. This reduces your risk of selling assets at a loss during market downturns.
5.
Talk to Your Family and Financial Advisor
Long-term care is not just a financial issue. It’s emotional, logistical, and often messy. Have frank conversations:
- Who will provide care if needed?
- Where will you live?
- Who handles your finances if you’re incapacitated?
Involve a qualified financial planner to help run simulations for both phases. A good advisor will model both average and worst-case scenarios—and help you plan for both.
Final Thoughts: Don’t Be the Optimist Without a Plan
We get it—no one wants to think about needing help to go to the bathroom. But refusing to plan for the expensive indignities of aging doesn’t make them less likely. It just makes them more damaging.
Retirement isn’t a single phase of life. It’s a journey that starts with adventure and freedom — and ends, for many, with vulnerability and escalating costs. The best plan embraces both realities, allowing you to live well now, and live with dignity later.
Don’t just plan for “retirement.” Plan for all of it.