Planning for Three Stages of Retirement

Posted on Wednesday, August 22, 2018

Several trends seem to indicate that larger amounts will be needed to fund retirement.

Social Security and pension benefits are comprising a smaller percentage of retirement income, meaning that personal investments must contribute a higher percentage. As life expectancies continue to increase, personal investments must last for longer periods.

And many individuals want to retire sooner, often well before age 65. Retiring earlier and in better health, retirees are often more active than those in previous generations, making their lifestyles more expensive. The convergence of all these trends can make the savings needed for retirement seem overwhelming.

However, what is missing from this analysis is the fact that retirement often proceeds in stages, with different spending trends in each stage. The three basic phases include:

• An active phase, when the retiree is in good health and actively pursues travel and hobbies. This is typically the most expensive phase.
• A passive phase, when the retiree's energy starts to wane. Life starts to slow down and living expenses typically go down.
• A final phase, when medical conditions often result in subsistence living. This is typically a more expensive time than the passive phase due to increased medical expenses, but as long as proper medical arrangements have been made in advance, probably not as expensive as the active phase.

When planning for your retirement, keep in mind that the active stage is typically the most expensive and your living costs are likely to decrease as you age. This may substantially alter the amount you need for retirement.

Posted in Tax Topics For Individuals

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