The 3 Stages of Retirement

retirementMy Comments: I recently wrote about where we are now in the overall market cycle and the likely chance of a major disruption that will effect your financial future. My post was titled “Are We There Yet?

Most of us have visions of a successful retirement. Of course, “success” is dependent on your life today, your health, and countless other variables. My role is to help anyone and everyone achieve a level of financial freedom that allows you to live your life free from financial fear. (a lot of efs there!)

Not matter how successful you are or were during the accumulation of money phase of your life, you are now, or at some time will be, in the distribution of money phase. For most of us, this requires a different mind set. That in turn requires a different set of financial tools to get you where you want to go.

What you choose to do with your life in retirement falls into what I think of as three distinct phases. How long they last is completely unknown, but they are likely to follow this sequence.

The first I call the Go-Go years. This is when you are newly retired and you have a bucket list of things you want to do, can probably afford to do, but may be afraid to do. You hold back to keep from jeopardizing your future years if history repeats itself and the markets go haywire for a while. (does anyone know the origin of the expression “haywire”?)

The second phase I call the Slow-Go years. This is when the mind and body starts to slow you down, whether you want it to or not. Hopefully by then you’ll have spent some time in the Go-Go years and are OK and recognize your limitations.

The last phase is the No-Go years. This is when you find going slow is too much and you need the help of others to get from one day to the next. It’s not a pleasant prospect. But I’ve never met an active 90 year old in the Slow-Go phase who was ready to call it quits. Quite the opposite.

But bad things happen to good people from time to time. How you manage the distribution of money phase of life will have a telling effect on the quality of your life in the Go-Go phase, the Slow-Go phase and the No-Go phase.

No matter how successful you were in the accumulation of money phase, you have to focus time and energy if you want a successful distribution of money phase. Some of this involves the recognition of what I call existential risk.

Existential risk, in my world, is a phrase to describe things that might or might not happen. No one expects our house to burn down or be destroyed by a hurricane, but we buy homeowners insurance. We might have a wreck and damage or total our car, so we buy auto insurance. Some of us buy life insurance so that if we die unexpectedly, there is cash to help our family get on with their lives. All along, we determine how much of a threat such an event will have on our lives and we allocate resources to protect ourselves.

Some of the existential risks of retirement are catastrophic illness, like a stroke, or chronic illness like dementia. As life expectancy increases, a newly talked about risk is longevity risk, which is running out of money. None of hope these things will happen, but it makes sense to at least recognize the possibility and perhaps reposition our money to offset some of the risk.

How fast you withdraw funds on a monthly basis from your accumulated funds is a largely arbitrary decision. It matters less if you have already dealt with the existential risks you might face. The financial planning community is arguing constantly about what annual rate of withdrawal is appropriate.

It depends on you. If you are willing to experience the pain of dramatic declines in value, then the rate at which you withdraw money will have to be less. That’s largely because if your accounts go down hard, you have less time to recover. Meantime, you might be sweating bullets, and that’s not usually a good thing.

If you take appropriate steps to protect yourself, then a larger withdrawal rate may be appropriate. That translates to a more satisfying experience during the Go-Go years, knowing you have taken steps to allow a smoother and later transition into the Slow-Go and No-Go years.

It’s up to you what you do. But I encourage you to believe acting sooner rather than later will be in your best interest.

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