Why It's Important to Understand the Four Stages of Retirement

One of the biggest mistakes I find that people make is misunderstanding what retirement is. Many think it is the end goal — in other words, they look at the act of retiring as being the finish line. The reality is that there are distinct phases of retirement and as planners we need to understand them and know how to adjust our planning for them accordingly. 

Most people understand the different phases of our working years - we search for something to do after college, start a business, have kids, do the soccer coaching thing, go on vacation with the family, send them off to college (they may even come back) and then we enjoy our alone time while accelerating our savings for retirement. All of these stages are understood, and as planners we have a sense of the time frames and planning strategies to help our clients achieve their specific goals. 

But how well do we do when it comes to recognizing the different stages of retirement and helping our clients achieve those goals? I find that most people don't know what they don't know about retirement, and it is our role to uncover for them the issues they are facing before it derails them. So, what are these retirement stages? And, how can you plan for them? Let's take a brief look at each one. 

Stage 1: Pre Retirement  Typically, this is the period 5-7 years before retirement.

I find that one of the biggest planning issues with this stage is not benchmarking returns properly. We have all seen those ads that talk about knowing your "retirement number." Even if your client knows what that number is, do you track the progress of reaching that number? Recently I saw a new client who 3 years ago had hit her number. That was the good news - the bad news was that she never knew it and took a 40% hit to the portfolio. If she had known how to benchmark her portfolio to her retirement goals, then she could have shifted the objectives for her investments and not been thrown so off track from her expected retirement date. 

Stage 2: The transition into actual Retirement  This is the period 6 to 12 months prior to the actual date. 

There are two important planning considerations we address with our clients when they are about to enter into the actual retirement phase. 

First, how is the client going to fill the hours that used to be filled by working? Work is more than just a paycheck. It represents a place to be, structure, a reason to get up and out of bed, an ability to associate with peers, a sense of self-worth and much more. So is the client going to fill that time with hobbies? A part time job? A new career? Baby sitting duties? My clients who have figured this out say they don't know how they had time before to go to work. 

Second, helping them develop the Bucket List. We all talk about those big trips, purchases, things we want to do. Unfortunately, we can't do the proper planning if the client says they want to go to Italy, but we don't know when, for how long, budget issues, etc. Help them to fill out their own Bucket List. It will not only give them something to plan for, but it will also make the planning easier when we know exactly how they define their ideal retirement. 

Stage 3: The Active Years Typically, this is the first 10-15 years into retirement. 

This is the stage that clients tend to be more proactive about planning trips, looking for new adventures, advancing their learning, etc. 

From a planning perspective, this is the change from the accumulation stage to the distribution stage. We have to put in place the strategies to not only manage the money, but to distribute the money in as tax efficient a manner as possible. We have to be very aware of the proper withdrawal rates. Now that we are all living longer, it is essential that we only take out what prudent planning parameters will allow. 

This is also a time we may have to become better listeners. Fifteen years ago when my client Bobbie asked me if she could "do the kitchen cabinets," she wasn't asking me because I was a good carpenter (she should have known better). What she was actually asking was if she spent the money on the upgrade, where would it come from, how could she access it and would that impact her income in her later years. 

Stage 4: The Back Nine  Now is when we truly think about putting our "house" in order. 

And, depending on what the clients' needs are, we may start to make planning decisions that we would not have made earlier on. 

For example, I have a 79-year-old client who came to me and said that he was thinking about buying a second home. We talked about the typical 4% withdrawal rate parameters and based on that it probably was not prudent to take the money for the additional expense of the second home, because we would have to take out more than the 4% rate. We then took a step back and talked about life expectancy. We talked about the fact that the portfolio would probably be losing ground if he were to move forward with the second home. If his $1.5Million portfolio was only $1Million in 15 years, would he be ok with that? 

The importance of the conversation was to open his eyes to the possibilities. He was in a different stage and could look at his planning from a different perspective. There really was no "right" answer — however, the conversation we had with him opened up opportunities he had not realized before. 

His response was to thank me for showing him a new perspective — a conversation, he said, he did not believe he would have had with his previous financial advisor. 

By talking to your clients about these four phases of their retirement and helping them plan for each one, you'll enhance their awareness of the probable road ahead of them, and facilitate a retirement that's enjoyable and free from financial worry.