Feb 1, 2017
Pattie Lovett-Reid: The 3 phases of retirement
Generating retirement income isn't without its challenges. You have to consider income from savings and ensure your capital supports your lifespan, all while balancing the desire to leave a legacy to your family and support philanthropic interests.
Traditionally, retirees were advised to follow the “four per cent rule,” a notion often relied upon to determine the sustainable level of annual portfolio withdrawals. The rule sought to provide a steady stream of income, while also keeping an eye on your account balance to ensure your assets last throughout retirement. The challenge now is that we live in an environment where interest rates are at historically low levels, providing little support for risk-free income and forcing a higher weighting towards stocks in an effort to boost required returns.
The simpler days are now a thing of the past, according to Ryan Gerstel of Gerstel Wealth Management.
Gerstel lists three assumptions that retirees can no longer make confidently:
- Lifestyle expense forecasts that increase in a straight line each year
- All expenses consistently grow at the same rate of inflation during retirement
- Projecting stable investment returns, without considering the possibility of downturns or recessions that may impact returns
All three of these assumptions can create a false sense of reality as they paint a picture of linear retirement consumption and consistent annual returns. Your life isn't fixed so why would your plan be?
Gerstel will tell lifestyle choices often occur in three stages in retirement, each impacting lifestyle expenses, healthcare costs and leisure activities. Research has shown that spending patterns in retirement do not occur in a straight line, but rather in distinct phases. For example, spending on leisure activities tends to be higher in early retirement, while healthcare costs tend to increase later in life.
Research suggests when examining a 30-year retirement period, lifestyle needs and activities tend to occur in different "age bands," which are often characterized by activity levels. Ages 65 to 74 are the “Go-Go” years, ages 75 to 84 are the “Slow-Go” years, and 85 to 95 the “No-Go” years. They can be further split into four general categories with their own rates of change and inflation: basic living, leisure, health care, and taxes.
Ignoring the likely pattern of spending habits during these three stages creates exposure to both lifestyle and longevity risk. Every retirement is different but one thing is certain -- gone are the days of the one-size retirement plan fitting all.
