Preparing for the Three Phases of Retirement

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We don’t tend to see retirement as one of the primary inevitabilities of life—it isn’t as sure as death and taxes. However, if we live long enough, there will come a time when we either no longer desire or are no longer able to engage in our business or recreational pursuits. When that time comes, we will need the money we worked hard to save to work hard in preserving our standard of living.

If there are three main phases in life, retirement is unique among them. The early phase could be called the “learning” period constituted with education and preparation. The next phase may be called the “earning” period where we apply ourselves in our chosen professions. When that phase is done, we tend to think of the final stage as retirement. The difference between this final stage and the ones before is that there isn’t a following stage… retirement is an end of life period.


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Within retirement, there are more phases to consider: Active, Slowing, and Convalescent periods. I’m going to deal with each of them in successive columns. Let’s look at the first one here.

The Active Period

This is the time of retirement most of us dream about. We see the rounds of golf, sailing, travel, and playing with grandchildren. We are done with business obligations and able to focus on personal goals, though we may work as a choice or for additional benefits. We are generally young enough to participate in our favorite activities and travel is a pleasure. How long we can expect to remain active depends largely on family history, lifestyle and overall health.

One of the challenges of this period is balancing the “here and now” against the future. Our investments have a long time-horizon as this stage begins with a lot of life left to live. We have important decisions to make, though, that will have a lasting impact on the rest of retirement… when should we start taking Social Security income? If we have a pension, do we go with the single-life option or ensure income continues for the life of both spouses? Do we focus our retirement assets in income-producing securities or keep some growing for future needs? These are personal decisions as unique as individuals.


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Outliving retirement assets is a great tragedy. When we focus too much on enjoying the active phase of retirement, we run the risk of dependency later. Remaining independent requires a critical and honest approach to income that addresses anticipated needs from beginning to end for all involved.

Since retirement is an end of life phase, estate planning is essential. If we have the assets we need to live life on our own terms, we should have a plan for the disbursement of those assets at our passing. Dying without these preparations doesn’t mean there isn’t a plan for disbursement—it just isn’t our plan. Those we might want to benefit may be disinherited by the laws of intestate.

Married couples have more on their minds. One of them is likely to precede the other in death. Will the surviving spouse be able to continue in the same standard of living? They should look at their sources of income to see what happens to that income at the passing of each of them. For example, while they live, they may be entitled to Social Security income. A non-working spouse may receive as much as half of the earning spouse’s amount. At the death of either one of them, the lower amount goes away and only the higher amount remains. When making choices on retirement income (pensions, timing of Social Security, annuity income, et al), ensure the needs of both spouses are met for their lifetimes. Consider life insurance to account for anticipated shortfalls.

Along with concerns about income are the issues of control. This is where the other areas of estate planning become important. We should carefully choose attorneys-in-fact and successor trustees to help manage our assets and our lives when we become unable to do it ourselves. Many will want to have a family member assume these roles but not all will know people up to the challenge. However, many successors are chosen, I recommend most people consider a corporate entity as a final successor to make certain someone of their choosing is managing their affairs.


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The Slowing Years

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As time goes on, our bodies become less able to do the things we’ve always enjoyed. Travel isn’t as much fun as natural aches and pains make it less worthwhile. We slow down our pace of life. Recreational pursuits trend downward and medical expenses tend to rise (more on this in the next section). In this period, we realize personally that we must prepare for what comes next. Let’s talk about that.

One of the biggest holes in most retirement plans is preparation for long-term care needs. It’s a fairly universal need and planning starts before it’s needed. Married couples usually assume they will take care of each other, while they are able. Single people or surviving spouses have to look elsewhere for help. For many people, this is the reason they purchase Long-Term Care insurance (LTCi). Unfortunately, traditional policies have become very expensive for what they cover.

Traditional LTCi looks much like other types of insurance. Insured individuals pay their premiums until the time when they initiate a claim. Those of us who sell this type of insurance were trained to use the following statistic to explain the need: a 65-year-old person has a greater than 50% chance of needing long term care services before their death (help with at least two activities of daily living). The problem? It turned out to be true. How can an insurance company adequately price insurance with a 50% claims rate? Many people were projected to get all of their premiums back within the first six months on claim!

This changing landscape has greatly reduced the number of insurance companies willing to sell traditional LTCi policies—with increased premiums and reduced benefits. Now, most LTCi is sold as a hybrid with other types of policies—annuities with LTCi and life insurance with LTCi predominate. Most of these policies do not follow the traditional model of lifetime premiums until there is a claim. These tend to require lump-sum amounts invested upfront. This reality tends to limit the number of people able to take advantage of such policies. Where can average people find pools of money to invest?

Those who have old annuities and life insurance policies may find a benefit in exchanging them for policies with included LTCi. Before doing so, investors should be sure they don’t need the policies for their original intended purpose. What can be the benefit? Picture an annuity with a low cost-basis. Any income taken from the annuity will be taxable. Exchanging this policy for one including LTCi may add a tax-free LTC benefit and still keep the ability to take future income, if needed.

There are many who plan to use Medicaid for this purpose, when the need arises. There are special planning considerations to reducing assets and protecting wealth while trying to qualify for future benefits. Consider something… most facilities have a limited number of beds available for this program. If this becomes a widespread approach, many of us will be waiting in a long line for a bed to open. This is a valid planning option… just consider the practicalities and do what you can to take care of yourself while you are able.

Convalescing Period


Eventually, a time will come when we find ourselves bound by geography and ability. We need to rely more on others in our activities of daily living. Despite our protestations, we can’t do what we were once able to do. In our planning, we shouldn’t neglect to prepare for this time in life to ensure our caregivers know our preferences and help facilitate our desired life choices. We may need to adjust our living arrangements to accommodate our changing abilities.

Retirement is an end-of-life phase. Estate planning is an essential element of proper planning—especially ensuring for the continued well-being of a surviving spouse from. Preparing to have help, when needed, by planning for Long-Term Care (LTC) costs is another important element. Related to both of these is a consideration for our general health. We can be very careful of our diet and exercise, avoid contagions, and not take unnecessary risks—and still only have limited control over our longevity. As a group, life expectancies are increasing. As individuals, we simply do our best to take care of ourselves.

Our bodies are organic machines. They take care and maintenance and wear down over time. Although many of us plan to keep working in some capacity in retirement (68% in a survey by the Employee Benefit Research Institute), it doesn’t always work out (28% actually did). The number one reason for this unfulfilled expectation is due to health problems or disability.

Access to healthcare and the costs of coverage and care loom over retirement financial decisions. Even though most retirees will rely on Medicare beginning at age 65, it is an insurance program—costs are projected based on expenses. As we get older, our healthcare needs typically grow and so do our expenses. Inflation of healthcare costs has been well above average inflation in the economy for decades. An aging population with increasing government and insurance benefits drives prices higher. Planning for healthcare expenses in retirement is growing in importance every year.

Bear in mind that planning for Medicare comes with deadlines. Those who don’t sign up for Parts B and D at the right time may be subject to significant permanent penalties. Know how Medicare relates to other coverages and don’t miss the filing deadlines!

Another Medicare cost consideration is an annual surcharge based on income. Those with significant retirement incomes will likely encounter additional amounts added to their premiums. One way to help avoid this is to plan ahead to take advantage of Roth and Health Savings accounts. These sources of income aren’t considered in the surcharge calculation (as long as HSA withdrawals are for healthcare expenses).

Choosing where to spend the retirement years is more than deciding who has the best amenities for an active lifestyle. Location will determine taxation, access to healthcare, cost and availability of Long-Term Care services, and quality of life. Florida isn’t just a common destination for retirees for the lack of snow. As retirees have sought the warmer climate over the decades, infrastructure has followed to accommodate the needs of an aging population. It may be personally difficult to uproot from a lifetime in a locality, but it is an important consideration for a comfortable retirement.

We may have a picture of retirement in our minds that seems care-free and relaxing. The reality is that we will only realize it when we have prepared for the eventualities of life. Having a sound plan is the path to financial confidence and a comfortable retirement.

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