What are the Phases of Retirement?
I functionally label retirement into 3 Phases for couples:
- Phase I: Both of you are here.
- Phase II: One of you are here.
- Phase III: Neither of you are here.
Each phase requires a bit of thought and planning.
Most people focus on just Phase I (they’re both here): Retirement Income: how can they maximize their income for as long as they may live? A lot of research has been, and continues to be done, on this area for this Phase.
Decisions they make in Phase I affect couple’s Phase II (only one is here): Survivor Income. This is the phase many couples recognize that they have made Phase I mistakes. For example, Social Security has an automatic pay cut built in for either survivor – the lower benefit goes away. For those couples with pension decisions, only the 100% Survivor option doesn’t involve a pay cut for the survivor.
THIS IS THE PHASE most couples gloss over without thinking through what the plan should be.
The question for Phase II planning DURING Phase I is what is the plan as to how to replace that lost income for either as the survivor?
- Set aside assets so they’re not included in Phase I income?
- Life insurance (pops in specifically as an asset when needed (unless term life chosen, and the term expires before the insured does; or term bought for the wrong insured – i.e., one dies in the wrong order assumed)?
- Reverse mortgage or deferred income annuities may also be a part of the plan?
- Or, develop a plan where the survivor consciously knows they must downsize spending (reduce their Standard of Living)?
That same research for retirement income can be applied to the survivor since the question hasn’t really changed in regards to resources required to sustain their standard of living as long as they may live. What gets missed though, is planning for the question – how to replace lost income?
Phase III – you guessed it – neither is here: Estate Planning. Being sure the estate plan is developed and then reviewed once in a while … not so much from the person’s beneficiary perspectives, etc., but from a lawyer review making sure that changes in law, legal precedents, or interpretations of language haven’t changed suggesting documents should be updated to reflect such things people don’t typically know about unless getting advice and insight from those deeply involved in the practice of probate law.
Many people assume they won’t have resources that need estate planning. However, upon closer inspection, as long as they are alive, they need resources to support their standard of living. If they spend down all their resources, their standard of living is likely less too. Some argue that buying a life annuity (income as long as they live) avoids the estate plan issue since they’ve exchanged their assets for lifetime income. This may have resolved their estate planning issue by not having assets to provide income, however fixed annuity income loses purchasing power with time so, again standard of living goes down.
A visual representation of the transition between various retirement phases may also be seen in an excellent post by Dirk Cotton where he describes these chronologically with a chess game comparison: Opening Game, Middle Game and End Game. My description above is a functional approach to viewing retirement phases. Both are important so you understand that retirement is anything but fixed.
When looking at Dirk’s Endgame graphics … mentally rotate the 2nd and 3rd triangle shaped graphics 90 degrees counter-clockwise so it looks like the graphic to the right (I wish to thank Dirk for permission to use his graphic) … now the dark grey dots on the left sub-triangle, in my example, would represent past incomes of earlier years, and the green triangle dots would represent the range of possible future income. Each column of dots would represent one particular age in time, either past (black dots), present (the last black dot), or future (green dots). Notice the green series looks a lot like Monte Carlo simulations. Also note that a lot of the past uncertainty from the dark grey dotted triangle, has gone away. The only uncertainty now are the green triangle dots.
Moral of the story: Financial Planning isn’t just about the question you have on your mind at the moment, but looks ahead based on experience, to other issues that are to come.
PS. This post explains how time, or aging, is important to the retirement income process too: “You’d never guess what factor is most important for retirement income!”
PPS. Singles don’t have to worry about Phase II for survivors who are partially depending on their income like couples do.
Top photo by Abhikdhar2009 (Own work) [CC BY-SA 3.0], via Wikimedia Commons
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