Step 1: Read The Article
When it comes to retirement planning, averages often hide more than they reveal.
Specifically, relying on investing average rates of return doesn’t reflect the real-world ups and downs of your financial life in retirement.
While your Portfolio Income Needs (PIN) does an excellent job of helping you estimate the average return you theoretically need, this number tells only part of the story. (If you have not calculated your PIN, then read our article, Entering The Retirement Red Zone: The Single Most Important Number To Calculate.)
Why?
Because retirement unfolds in phases.
What’s more, each phase comes with different income and spending dynamics, and different risk requirements.
A Realistic Look at Retirement: Spending Phases
Let’s look at a hypothetical pre-retiree who’ll likely move through four distinct stages of retirement.
The following scenario is quite common. Keep in mind, however, the target investment returns are approximations, and will vary depending on your unique financial situation.
Retirement is rarely a straight line.
In fact, each retirement “phase” usually demands a DIFFERENT investment rate of return.
The four phases include:
#1—Pre-Retirement (Saving Years)
> Snapshot: Still working and contributing to savings, needing modest growth (target about 5% return).
During this phase, you’re still earning a paycheck and actively contributing to your retirement accounts.
The focus here is building your nest egg while minimizing unnecessary risks.
Because your savings contributions are ongoing, your portfolio doesn’t need to shoulder the full burden of growth, i.e., you’re combining saving with modest market returns to move your retirement income needle forward. Therefore, you need less investment risk.
#2—Early Retirement (Pre-Social Security)
> Snapshot: No earned income and Social Security hasn’t started, therefore, withdrawals are higher (target about 8% return).
During this phase, you’re FULLY RELIANT on your portfolio to fund your lifestyle, since you’re not drawing on Social Security or a pension yet.
You’re deliberately holding off on Social Security and possibly a pension to increase your eventual monthly benefit(s).
THE CHALLENGE?
Spending usually stays consistent, but your guaranteed income sources haven’t kicked in yet. That puts more pressure on your investments to fill income gaps, often requiring a higher rate of return.
Unfortunately, this can push you into taking more risk at a time when losses could be hard to recover from.
#3—Mid-Retirement (Main Phase)
> Snapshot: Social Security begins, income stabilizes and portfolio demands ease (target about 4.5% return).
Once guaranteed income sources like Social Security are activated, the burden on your portfolio lightens.
Your withdrawal rate likely decreases, and your financial plan can operate more conservatively.
This tends to be the longest and most stable stretch of retirement. With reduced pressure on returns, you may shift into more preservation-focused investing.
#4—Late Retirement (End-of-Life Care)
> Snapshot: Healthcare and long-term care needs increase spending, pushing portfolio demands higher again (target about 7.5% return).
As you age into your late 70s, 80s and beyond, medical and other care-related costs often rise significantly.
Even if your lifestyle spending declines, the potential for large healthcare expenses can spike your income needs.
To cover this final phase, your portfolio may once again need to generate higher returns, or require advanced planning, e.g., long-term care insurance, to manage the risk.
RETIREMENT PHASE | AGES | YEARS IN PHASE | NEEDED RATE OF RETURN | RISK ↓ ↑ |
Pre-Retirement(Saving Years) | 52-61 | 9 | 5% | ↓ |
Early Retirement(Pre-Social Security) | 62-67 | 5 | 8% | ↑ |
Mid-Retirement (Collecting Social Security) | 68-89 | 21 | 4.5% | ↓ |
Late Retirement (End-of-Life Care) | 90+ | 1+ | 7.5% | ↑ |
Average Rate of Return: 6.25% | ||||
*These numbers are approximate and hypothetical. Your individual investment rates of return will depend on your unique financial situation.
The HIDDEN DANGER of “Average” Thinking
The above average rate of return of 6.25% might look safe, but it masks risky short-term needs.
If you only plan for the average, you may fail to recognize when higher returns (and more risk) are needed in specific phases. This oversight can lead to bad timing, forced selling or underfunded care later in life.
Overall, SPENDING DRIVES YOUR RISK.
In fact, there are common spending trends among retirees.
So common, that this trend has a name…
The Retirement Smile
Retirement spending often follows a “smile” pattern: higher in the early years as retirees travel and enjoy newfound freedom, dipping in the middle years when routines settle, then rising again later due to healthcare costs.
This curve drives how much investment risk a retiree may need to take.
In the early and late phases, when spending peaks, portfolios may be under greater pressure to deliver returns. That means a well-structured plan must align expected spending with appropriate levels of investment risk, adjusting as lifestyle needs evolve over time.
Plan by Phase, Not by Averages
The key is understanding when and how much risk is appropriate across your retirement timeline.
Instead of leaning on a single return assumption, break your retirement into segments.
This way, you can:
- Align investments with short- vs. long-term spending needs.
- Reduce risk during vulnerable periods.
- Have contingency plans for high-cost phases like healthcare.
Trim Spending, Tame Risk
A key way to lower your investment risk, is to put less demand on your investment portfolio by lowering your expenses.
Effective budgeting, therefore, is a CRITICAL COMPONENT that helps build financially successful retirements.
[RESOURCE] Download our complimentary Monthly Budget worksheet. Couple this worksheet with our Income Gap Finder worksheet that helps you identify how large your income gap could be.
Use Portfolio Income Needs (PIN) to Make Informed Tradeoffs
Now that you know why average rates of return don’t tell the whole story, you can use your PIN to begin asking smarter questions, including:
- Are the returns I need reasonable, and how much risk comes with them?
- Am I saving enough now to reduce risk later?
- Can I realistically retire at the age I’m targeting?
Understanding these tradeoffs empowers you to adjust your plan—before reality forces your hand.
An experienced financial advisor can help you make sense of your options, avoid costly missteps and move forward with confidence. If you’re feeling unsure, then check out our 365 Retirement Plan. It’s easy and reduces stress.
NEXT STEPS
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How Much Do You Need To Retire?
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