Part Three: The 'Reflection' stage of Retirement or the Final years

Part Three: The 'Reflection' stage: 85 plus or the Final years

As this third stage is a time when health and finances may limit choice, it's a time to accept help graciously, to make the most of all those memories and to keep up with old friends because you hold each other's history.

In this stage, your life in retirement will change pretty dramatically. Accept it or not, your energy will be a lot less, your health will worsen, and you may not be able to get around like you used to. At this point, the cost of living drops dramatically because you won’t be going out as often, spending money on travel or keeping your gas tank filled up.

At this phase of retirement, chances are you’ve done what you have wanted and are now spending more time at home. There is often a transition to managing your own personal circumstances, which can be dominated by managing your health and well-being. 

Time and age play a role in slowing down activities and abilities. Sometimes this is mental, sometimes physical and sometimes it can be financial. There are often more pressures around managing the challenges of your physical health and potentially your cognitive decline.  

Cognitive decline is likely in some form, and careful planning of health care is needed, along with support to manage any assets and investments you may have to help meet these costs. It is common to be balancing your needs with considering what wealth you would like to pass on to the future family generations.

For many the cost of living drops dramatically in this phase, assuming you don’t need full-time health care. However, if your health dictates that you need to be in an environment with care at hand, then costs will go up during this phase, often rapidly be depleting your resources. Commonly this late stage requires some level of support from family, government and community agencies. It can be a time when assets have to be sold to fund healthcare requirements.

Although Canada’s health care system is very good, there will likely be out-of-pocket medical costs. You’ll also want to be sure to understand all your health care options and choices, especially what would happen if you become chronically or acutely ill. Being aware that costs can increase in this late stage of life means holding some of your resources back for use during these years. Often this stage requires some level of support from family or government agencies.

During the final stage of retirement, you will want to start thinking about your legacy, and if you have any heirs, what you want to leave to them. You should also have a plan about how you will be cared for if your health suffers to the point you can no longer take care of yourself.

You may need the help of family and friends to make the important financial decision as your cognitive skills may be on the decline. During the final stage of retirement, it’s important to focus on yourself, which means tending to your health, enjoying your loved ones and keeping a check on spending for unexpected costs.

Part Two: The 'Endeavour' stage of Retirement or the Taking Life Easier stage

The middle years of retirement are more about consolidation, a time to choose fun things, develop old skills, explore fresh talents and grow new friendships. The need to travel or just the hassle of travelling is less exciting and your focus is more on the simple things in life. Getting the family to come and visit you, thinking about perhaps downsizing the house and moving to something smaller with less maintenance. Sometimes your body is telling you to slow down a little.

From 75 to 85, life starts to slow down for retirees as the excitement of having so much free time wanes. Life starts falling into patterns and the excitement of retirement transitions to more of a daily routine. Routines such as seeing family at home on Sundays, groceries on Tuesdays, friends on Friday, etc. Part of the reason for these patterns is that energy levels are changing and patterns help minimise effort and thought without compromising on the enjoyment of life. 

The older you get, the more important it is to find routines and patterns that give you comfort and security. Maintaining regular activity, though, is important as well, but it might just mean you need to slow it down a little!

The middle stage of retirement doesn’t mean an end to the hobbies that you have enjoyed in the first phase, it’s just not at such a frenzied pace. Many are still pursuing their hobbies and travelling but at a slower pace, which means steady costs. Ideally, in this stage, health-care costs have been planned because sometimes health issues prompt unexpected spending on health services.

The cost of living typically plateaus in this period, but you may be considering downsizing your home or thinking about the benefits of retirement villages. Releasing the equity tied up in the family home sometimes becomes a necessity as you may find yourself asset rich but cash poor. So, downsizing can become a real option during the second phase, particularly if you have no money saved for health care or if all your money is tied up in assets.  

Periodically review your spending plan to ensure you’ve captured all your costs, including taxes and the effects of inflation. Cash flow is still important and expenses should still be close to the level it was during the first phase. Not having spare cash makes it harder to maintain the house and find money for the enjoyable things in life, like pampering the grandkids or going on another trip. At this point, you want your money to continue to grow, but preservation is more important, which means you should get more conservative with your investments. During the second phase of retirement, it’s not the time to invest in risky high-flying growth stocks or real-estate deals you heard about on the golf course.

Planning for the three stages of retirement: Discover, Endeavor and Reflection

Part One: The 'Discovery' stage: 65 – 74 or the Early Years

Retirement doesn’t happen only once. It’s an ongoing process that can easily last 30 years, and so it's important to plan and prepare for every stage. From the early days of retirement, when excitement and spending are high, to the later years of retirement, when you are slowing down and seeing your spending reduced dramatically, you will have to treat yourself and your investments differently, which is why planning for all stages of retirement is so important. So over the next few days, I will look at each stage of retirement you should consider planning for as you consider retirement.

Some retirement specialists talk about the “early years” of retirement, I like the term the Discovery years. This first or early stage of retirement will, for many, be the 'doing' years. The time to have a go at all the things you've said you'd get around to 'someday' and in this time you will begin to discover what is important to you.

Travelling, seeing family, spending more time on those hobbies and interests, and just getting on with it. You might expect to be physically and mentally capable of living a fairly active lifestyle. In fact, this phase may not be that much different than pre-retirement except that there may be more time to do things like travel and hobbies.

This stage could also still include work. It may be part-time work or consulting in the same field of your pre-retirement career, or it may mean self-employment. Whatever the case, active retirement is really living the stereotypical retirement dream. For many retirees in this phase, they are busier than they were prior to retirement.

It is common for your mind and body to be sharp and to be excited to embark on new adventures. As a result, you may find this to be the most expensive phase of retirement. Travel, boats, hobby cars or dining out with friends are often the fun things in life we look forward to in retirement.

However, you’ll have to balance these increased costs to ensure you don’t consume your savings in the first 10 years. That, in turn, means the cost of living increases during the early years of retirement with the extra money going out the door each month. During the early days of retirement, it’s a good idea to have your money continue to grow, which often means you will have to stay invested. You may think you have to get super conservative because you don’t want to lose any money, but it’s important to keep your investments working for you so that you have enough for the second two stages of retirement.

In the early years of retirement, you may spend more on travel, entertainment and hobbies, but other expenses such as commuting to work, eating out for lunch and buying a professional wardrobe will be lower or gone altogether.

Before you retire, it’s a good idea to come up with a list of the things you want to do in the early stage of retirement and plan and budget accordingly. When retirement is new and exciting, you will want to have the cash flow to fulfil your early retirement dream

LIveable Wage in retirement

Richard Thaler, who won the Nobel Prize suggests that employers should use the opt-out option rather than the current opt-in option to help employees invest for retirement. This is a good idea and one that the Canadian government follows with its pension plan, the Canadian Pension Plan (CPP). Everyone in Canada who works for another person has to pay into the Pension Plan, there is no opt-out clause. The Canada Pension Plan started in 1965.

It was a response to growing poverty among retired Canadians. The aim of the CPP was to cover 25 percent of a worker’s average lifetime earnings, up to a stated ceiling on earnings covered. The CPP was originally financed entirely by payroll taxes (or contributions) levied on employers, employees and the self-employed. Benefits depended on current contributions.

The CPP now earns investment income, along with payroll contributions, which are split equally between employers and employees, with the self-employed paying the full rate. The average annual CPP pension received by a retiring 65-year-old person at the end of 2016 was $7,728 – versus a possible maximum of $13,368. Plan participants can opt to start receiving their pension anytime between the ages of 60 and 70, with the annual pension amount adjusted up or down on an actuarially fair basis. The Plan also features an array of ancillary benefits for survivors, for disability and for death. The employer and the employee investment in the Plan at the end of 2016 was 9.9 percent of pay (split 50-50) on annual earnings between $3,500 and the maximum eligible earnings cap of $54,900.

In an earlier post, I suggested that the Financial Planning Industry would like us to invest about 15% of our income toward saving for retirement. Saving this amount is very difficult for young workers or even workers in their 40’s. However, if we recognize that we are already saving about 10% of our income through the Canada Pension Plan, then saving another 5% may not be difficult for some. For others, the idea of saving more is still something they cannot do on their income.

In Canada, there has been a movement to increase the amount of money Canadians save in their Canada Pension Plan, by raising the amount paid by the employer and the employee. If the rate was raised by 2.5% for each this would bring the Canadian worker to the 15% mark and would provide more income at retirement. The government could also raise the eligible earning cap from $54,900 to 75, 000. If the workers of Canada had more money from the CPP when they retired, the government could reduce the clawback ceiling for the OAS, from about $118,00 to a more equitable $65,000 a year. By doing this the government would have more money to give to those who did not work and should receive a pension. Some of the provinces in Canada are starting to look at the idea of a livable wage instead of paying welfare. This idea is normally seen as one that would affect young and middle-aged individuals and families, who are now on some sort of welfare. Moving toward the idea of a livable wage is a good idea, but it should also be carried into retirement for those who did not work, could not work or chose not to work, so we do not go back to high levels of poverty for seniors.