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Market Update| The 3 Phases of Retirement| November 29, 2021

Clinton Orr - Nov 29, 2021
A longer retirement means retirement will likely progress through a couple of phases, while everyone’s retirement is unique and requires a tailored plan, I believe, in general, most retirements progress through 3 phases

Retirement is changing, a few generations ago we spent the bulk of our time working, then had a short retirement before passing. Nowadays, folks are living longer, according to Statistics Canada a 70-year-old male, is now expected to live an additional 13.2 years, 70-year-old female an additional 16.9 years. It is not unusual for someone to spend 25 or 30 years in retirement. A longer retirement means retirement will likely progress through a couple of phases, while everyone’s retirement is unique and requires a tailored plan, I believe, in general, most retirements progress through 3 phases.

Lowes Financial Management in the UK describes the 3 phases as: Active, Passive and Supported. I agree with that characterization. The active phase is the early years of retirement, there is more travel, more hobbies, often the active phase is an extension of our pre-retirement lifestyle.

For some part time work might be part of the active phase. The ads for most financial companies usually depict people fishing, golfing or on the beach, that stereotypical vision of retirement is the active phase. Some clients tell me they feel busier in retirement than while they were working, that is not the case for everyone, in my opinion though, that feeling is most likely to happen in the active phase of retirement. Spending is usually higher in this phase. As we age our level of activity declines, the amount of travel and holidays usually decline as well, this is the passive phase. Sometimes this is referred to as the stable phase of retirement, as the early excitement of retirement fades and we develop more relaxed routines and patterns. Everyone has different goals when it comes to housing in retirement, but it is common for folks to downsize during the passive phase of retirement. Often our spending is lower in the passive phase. The third phase of retirement is the supported phase, healthcare costs are typically a larger portion of the budget during this phase. There could also be another move, as we transition to an assisted living or a full care facility. Spending usually increases during the supported phase.

The 3 phases as described by Lowes, matches research by David Blanchett, who looked at spending data of Canadian retirees. He found a similar pattern, that spending is generally higher in the early retirement years, dips in the middle and picks back up in the later portion of retirement. I wrote in more detail about David Blanchett’s research in a recent newsletter, if you’d like to read it we posted it on our website, you access it here.

I think it is important to note that the 3 phases are not the same length. It would be easy to plan if each phase was precisely 8 years or 10 years, but that is not the case. Health is usually the determining factor. For that reason, it is tough to work the three phases into a retirement plan, when will the active phase end and the passive phase begin? In 10 years? 15 years? Hopefully it is later rather than sooner, but we don’t know, health generally determines when one phase ends and the next begins.

When we work on retirement plans, I often encourage folks not to worry too much about how much they will spend at 75 or 85, but to focus on their current spending, specifically looking at their current budget. Everyone has a different vision for retirement, but often the active phase is an extension of our pre-retirement lifestyle, so the current budget can be a good starting point. To be conservative we often run our financial projections assuming the spending in the active phase will be consistent throughout retirement. The active phase is usually where spending is a little higher, so if the plan can support that level of spending, we have confidence the retirement is well funded.

The data tells us that eventually we will move into another phase of retirement and our spending patterns will change, but we don’t know when that will happen. That is why retirement planning is not a one-time activity. Life happens, which is why we need to periodically review and update our plan, to ensure it is still a good reflection of your actual retirement.

As always, if you have questions or would like to review your plan, please let us know. There is a whole team at your disposal, and we are happy to help.

Take Care,

Clinton