As people head into retirement, most start to dream about the exciting years ahead and the years that they will age through then try to put it into a financial plan. Rarely, if ever, does anyone reflect on their plan to see if their strategy was correct.

They simply live out their lives and adapt to the circumstances that present themselves. But for those who are planning how their money might work, a discussion on retirement spending and whether it still works the way history tells us is worthwhile.

Traditional thinking says our retirement spending tapers as we get older. But a new study disputes this.Credit: Simon Letch

The financial planning framework most people use was defined back in the 1960s, and it suggests that we should plan to spend smoothly across our lifespan. Bengen’s 4 per cent rule, released in 1994 and still widely used in planning, recommends that people will want to spend 4 per cent per year of their initial wealth at retirement and that this will need to be increased with inflation each year to live a comfortable retirement.

The second and perhaps more interesting theory was released in 2014 in the US by Blanchett. It suggests people actually spend more in the first years of active retirement; then spending tapers off as we become settled in a phase they call passive retirement; then again as we become more frail.

And, when you apply this framework to Australia, the latter two phases usually have lower costs simply because the majority of medical and care costs can be covered by the government.

Seems logical right?

Well, some smart researchers from Challenger have taken a deep dive into the actual spending data of Australians captured by various government surveys over their retirement, and they pose a different approach to planning your spending off the back of it.

It drives you to really think about what you want to spend over your retirement years and how you think your pattern of spending will work, rather than going off historical assumptions.