How to help your clients plan for volatile spending swings in retirement

There’s no such thing as a typical spending year in retirement. How much retirees spend from year to year can be as unpredictable as the Dow Jones Industrial Average, with spikes and dips along the way. 

But spending volatility in retirement presents both challenges and opportunities, making it important to map out a plan that can take advantage of years when clients foresee lower-spending needs and mitigate the negative impacts in spiky years. 

While inflation-adjusted spending generally falls as people move through retirement, expenditure increases and decreases are not uncommon. According to T. Rowe Price research,¹ one in four retirees experienced a 20% increase in spending over a two-year period, while one in four retirees also reported a 20% decrease in annual spending over a two-year period. 

How much or how little a retiree spends impacts planning. It creates the need to build resilient financial plans that stay on track in years when expenditures are higher than anticipated, as well as take advantage of so-called quiet years when dips in spending occur. 

You can’t control market volatility, but you can plan for spending swings 

Emphasize to your clients that there is great variability in spending. Life happens. And that means retirement income plans will be tested from time to time. 

In mapping out a retirement income plan, don’t rely on common rules of thumb that assume spending and retirement account withdrawals will be consistent each year after your clients stop working. 

The reality? There can be significant variability in spending throughout retirement.

Manage through periods of spending spikes: Planning ahead for the inevitable

Spending surges do happen, but they don’t have to cause a retirement income plan to break. The key is to develop strategies for clients that make the most of lower-spending years to offset the negatives resulting from periods of higher spending.

Planning for these spending surges is important as you want to ensure that clients are able to make tax-efficient withdrawals from their accounts if larger-than-usual distributions are needed to pay for a child’s wedding, a dream vacation, or an unexpected roof repair. 

There are many potential tax impacts, for example, when a spending surge occurs during retirement that could boost a client into a higher tax bracket and/or result in higher Medicare premiums. Say, for instance, your client’s taxable income of $403,550 is at the top of the 24% tax bracket for 2026. And the client then takes an additional $75,000 distribution from a traditional 401(k) to pay for their child’s graduate school tuition and room and board. That extra $75,000 of income pushes the client into the 32% tax bracket and results in a bigger tax bill. Similarly, a married couple that takes extra distributions from a traditional 401(k) or IRA may inadvertently boost their income above the $218,000 income threshold for Medicare, requiring them to pay higher premiums.

Strategies to take advantage of low-spending years

Clients may view low-spending years simply as years when they withdraw less, but advisors can help them see a bigger opportunity. Map out a plan to help retirees avoid costly outcomes, such as so-called tax-bracket creep. 

Discuss ways your client can bolster their odds of retirement success by taking advantage of years when they spend less, employing planning strategies that can result in lower taxes for them later in retirement.

Drive home the financial upsides of paying less in taxes overall. Your client might be unaware of the additional planning options available that can stretch these unspent dollars further. For example, they will need to withdraw less funds from their retirement savings for their expenses in low-spend years. And that means more opportunities to benefit from tax-saving strategies tied to lower tax brackets.

One example your client may consider is Roth conversions in low-spending years to boost tax efficiency in the future. You could suggest that clients deliberately withdraw more than they need to meet their spending needs. The reason? The higher taxes incurred from larger distributions taken in lighter spending years will be taxed at a lower rate, enabling them to avoid higher tax rates if the Roth conversion is done in a spike spending year. 

Going forward, they can generally take tax-free withdrawals from the Roth IRA once the account has satisfied the five-year holding period and they meet a qualifying condition. A qualified distribution is tax-free if taken at least 5 years after the year of your first Roth contribution AND you’ve reached age 59½, become totally disabled, died, or you meet the requirements for a first-time home purchase. If the distribution from your Roth IRA is not qualified, the earnings may be taxable. Additional taxes may apply for early withdrawals. Be aware, though, that each Roth conversion starts its own separate five-year clock for purposes of determining whether the converted amount can be withdrawn penalty-free.

Doing a Roth conversion in quiet spending years also increases the tax diversity of a retirement income stream. Placing more dollars in a Roth gives the client more flexibility in controlling the tax impact of retirement account withdrawals going forward. If your client has the bulk of their retirement savings in a traditional 401(k)—which taxes withdrawals as regular income—a Roth conversion can diversify the tax efficiency of the retirement assets. Since Roth IRA withdrawals are tax-free, it also enables clients to keep their taxable income low, which can reduce their required minimum distributions (RMDs) from non-Roth accounts, which typically start at age 73. 

Spending volatility is a fact of life in retirement. The key is to build an income plan that helps retirees manage spiky spending while turning lower-spending years into potential tax-saving opportunities. The goal: help reduce client angst by showing how a thoughtful plan can be designed to adapt to spending swings over time.