Separating retirement into phases a better approach
For a long time now, for planning purposes, we at Fagan Associates have been separating retirement into active and inactive phases in an attempt to educate our clients in regard to the impact of income or a lack thereof on their standards of living during the “golden years.” Furthermore, our focus has been more on the expenditure side of the ledger rather than the income side. Contrary to popular opinion but not to our surprise it appears as if other than healthcare, income should not be a primary concern as that has historically been more than offset by a decline in expenditures, which we argue can be attributed to the migration of retirees from an active phase to an inactive one.
Building upon the book “The Prosperous Retirement: Guide to the New Reality,” by Michael K. Stein, Kathy Prochaska-Cue, Extension Family Economist at the University of Nebraska goes so far as to separate retirement into four phases rather than the three that Stein outlined. Cue added the Transition Phase to Stein’s Active, Passive and Final ones. For the purpose of this column we will focus on two of the four phases, Active and Passive. However, we would be remiss if we did not include Stein’s definition of a prosperous retirement as the time when “the focus of daily activity shifts from economic productivity to… chasing dreams.”
Cue describes that Active Phase as “one of the most active and enjoyable phases of life as you pursue athletic, philanthropic, intellectual, spiritual, entrepreneurial and hobby interests.” It is during this phase that most of the resources that you have worked a lifetime to accumulate are deployed. This includes defined benefit and defined contribution pension plans, Social Security, Individual Retirement Accounts, Reverse Mortgages, Brokerage Accounts, etcetera.
As stated in Cue’s article, the Passive Phase is one in which “eventually people may decide they’ve had enough of going and doing. Perhaps health is not as good as it was during the Active Phase. People may be ready to eliminate all but just a few of their outside activities so they become more ‘home bodies.’ They also may become more reflective about life. While health may be a concern and limit outside involvement, becoming less social often is a natural part of this life phase. It does not mean one becomes a hermit. It does mean people may become more selective about what they do and when, where, and how they do it.”
A key takeaway from the above two paragraphs is that as one transitions from the active to inactive phase, most expenditures decrease. According to an Article prepared by Ann C. Foster, an economist in the Offices of Prices and Living Conditions, Bureau of Labor Statistics, income and expenditures peak between ages 45-54 and then decline for those between ages 5564, 65-74 and 75 and older. Mean food expenditures also peak between the ages of 45-54. This is further broken down into food at home and food away from home, which also both peak between ages 45-54. Indeed, non-housing expenditures, housing expenditures, clothing and transportation all peaked prior to age 54.
The one expense that tends to increase with age is Healthcare which, according to the BLS, “healthcare’s share of the household budget increased with age from 3.1 percent for the under-25 group to 14.3 percent for the 75-and-older group.” Foster goes on to note that “because the CE [Consumer Expenditures] does not sample the institutionalized population, most household spending on nursing home care is not included. Data from the National Health Expenditure Accounts (NHEA), which include the institutionalized population, show that in 2013, household out-ofpocket spending accounted for 29.4 percent ($45.8 billion) of the $155.8 billion spent on nursing home care.”
Our overall takeaway on the data, some of which is referenced above, is that as one ages outside of nursing home care, income requirements even adjusted for inflation during retirement has been more than offset by a more sedentary lifestyle. This would also imply the need for planning as it pertains to custodial care, either in a nursing home or while still at home. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, please call 518279-1044.