The Three Stages of Hiking
In high school, I often went hiking to stay in shape for basketball and soccer seasons. My friends and I would pile into a truck and head for the mountains. At the start of our hikes, we were full of energy and ready to conquer the mountain.
But as the hike progressed, our legs would tire. Despite our desire to maintain the initial speed, our bodies would slow down. Snack breaks became more frequent, and we took more time to enjoy the views. At least that’s what we told ourselves 😊
By the time we reached the top of the mountain, all we wanted was to sit down, have a nice lunch, and soak in the views of mountains, rivers, valleys, and wildlife. We reached a point where we no longer craved activity; we simply wanted to enjoy the scenery.
The Three Stages of Retirement
Just like my hiking experience, the journey through retirement is not monolithic. In fact, retirement is a journey with three distinct phases, each requiring a different financial perspective. These three phrases have been commonly dubbed the Go-Go, Slow-Go, and No-Go years.
Research indicates that retirees’ spending patterns evolve through the three stages, which can be visualized in a retirement “spending smile”. Retirees spend the most money in the Go-Go years, followed by a decline in the Slow-Go years. In the No-Go years, the reduced spending largely ceases, primarily driven by additional health care costs and charitable giving. See the “smile” below.
*Source: Michael Kitces, February 22, 2017
The Go-Go Years – Full Speed Ahead
The Go-Go years are the time for adventure—traveling, hobbies, dining out, and making the most of newfound freedom.
Because of this excitement and energy around the early retirement years, financial plans may need to include additional one-time expenses for the new home project or that bucket-list vacation.
While the tendency for many new retirees is to hunker down and reduce spending (because they no longer have a regular paycheck coming in), it’s important to remember the reasons why one has saved so much. I have heard too many retirees tell me that they wish they had enjoyed their healthy years of retirement, rather than waiting until their health and mobility had declined.
Key financial considerations:
- Portfolio Withdrawal and Social Security strategy – As an old mentor taught me, “happiness in retirement is positive cash flow.” Although the research typically indicates that it is more financially optimal for retirees to wait on Social Security, for some (though certainly not all), taking it early may be the right decision due to the emotional factor. The extra cash flow in the early years of retirement may allow them to enjoy things they otherwise would be hesitant to spend money on (assuming their financial plan is still healthy).
In addition to the Social Security strategy, the retiree in the Go-Go years needs to understand how they are funding their lifestyle. Will your paycheck come via your IRA? Dividends and Interest from a Trust account? A Roth IRA? Because of the varying ways these accounts are taxed, tax planning becomes extremely important.
- Health insurance and Medicare planning – If retirement begins before age 65, bridging the gap to Medicare is critical (and often expensive). Even after enrolling, supplemental health insurance may be needed.
- Investment approach – While retirees often shift to more conservative portfolios, the growth of income is still necessary to outpace inflation over the next 20-30 years. Dividend Growth, anyone?
While it’s prudent to ensure you’re not overspending, we also advocate that clients take advantage of these early (and hopefully healthy) years of retirement if their financial plan allows for it.
The Slow-Go Years – Shifting Gears
For some, the Slow-Go years may hit in their late 60s, and for others it may be in their 80s, but eventually we all start to slow down (like my frequent snack breaks on my hikes).
Travel may still be appealing, but perhaps closer to home. Instead of cross-country road trips, it’s more about local getaways. This leads to the typical decline in spending as discussed above.
Key financial considerations:
- Long-term care planning – The likelihood of needing assisted living or home health care increases. Hopefully, this has been planned for a long time in advance of the actual need.
- Charitable considerations – At this point, “legacy” becomes more urgent and important. As the saying goes, “you never see a U-Haul behind a hearse”. Strategic giving becomes more and more important, whether it’s to children or charities.
The No-Go Years – Legacy
In the No-Go phase, daily life becomes more home-centered. Physical limitations, health concerns, and cognitive changes often shift priorities from spending (think entertainment, dining out, travel) to sustaining. This stage, typically in the mid-80s and beyond, is less about adventure and more about stability and care.
While discretionary costs are low, healthcare and caregiving expenses can rise sharply. What makes this stage challenging from a planning perspective is that you don’t know if it will last one year or ten years.
Key financial considerations:
- Health Care Expenses – We will often break out health care as a separate category in our financial plans with a higher inflation rate than other categories.
- Estate and legacy planning – Ensuring assets are properly structured for heirs, minimizing taxes, and setting up trusts or charitable contributions are important.
- Simplification – Reducing complexity, consolidating assets, and setting up automated payments can make financial management easier.
The Evolution of Retirement Planning
That retiree spending patterns tend to resemble a smile or learning about the three distinct phases in retirement are not just interesting factoids and tidbits. These inform how we approach financial and retirement planning.
Personal finance is personal, and rules of thumb or generic retirement calculators do not often account for a real-world retirement. A 4% guideline withdrawal rate (one of the industry’s favorite rules of thumb) may be helpful for a robot, but I find it lacking when dealing with real clients with evolving aspirations and desires throughout their retirement.
Navigating each phase requires adaptation and careful planning to ensure confidence in retirement.
As always, reach out with questions or comments, and let us know how we can help you navigate through the Go-Go, Slow-Go, and No-Go years.
