Plan Sponsors

Saving for four different retirements

Joseph F. Coughlin, Ph.D., Director, Massachusetts Institute of Technology AgeLab


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Many people have a picture of retirement that is one of extremes. It’s either that of an active, cruise-loving bon vivant barely out of middle age, or that of a frail and failing elder unable to live alone. But neither image fully depicts a retirement that can span 30 years or more. Between these two extremes is a potentially long period during which a retiree won’t be jetting off on trips but won’t be bedridden either.

In fact, many retirees will go through four phases of retirement, each with its own financial and quality-of-life challenges that require careful planning. While each phase is distinct, they do not occur at any specific time or age. Rather, the changing context of an individual’s life in retirement can make the 30-plus years after full-time work almost feel like four different retirements:

Why does this matter to plan sponsors? Because employees who understand what’s coming feel more empowered to plan for the future.

People of different ages have different fears about their eventual retirement, with an overwhelming focus on financial stability and health/illness (see Exhibit 1). For most people, the primary response to fear is paralysis. But if plan sponsors can put these fears in context and help employees understand that there are ways to plan for them, employees are more likely to take the actions that will help them help themselves.

Four Phases Retirement Chart

What does each phase of retirement look like?

Managing the transition: During this phase, a retiree—let’s call her Karen—is easing out of work and into retirement. She may still be working part-time, or have a partner who works full- or part-time. She probably still lives in the home where she spent her working years, and may have a child in or just out of college who is dependent on her for housing. During this phase, Karen is at her most healthy and active, and this is the most likely time for her to be spotted on a sunset cruise. Not only does she have her health, but her continued workplace participation means she is not completely dependent on her retirement income.

Confronting big decisions: By now, Karen is fully retired, and the kids have finally moved out. With no job income, she must have a strategy for creating enough monthly income to meet her needs, using her personal savings, Social Security, and any employer-sponsored retirement plan payments, including defined benefit payments. She may need to think about changes to her lifestyle, depending on how well she has prepared financially for retirement.

This is also when the physical reality of aging starts to creep into the picture. She may begin to foresee the possibility of disability, or potentially losing her partner and living alone. There are big strategic decisions to be made, including: Where am I going to live? Do I downsize? Do I move to a retirement community? If I’m going to stay in my home, what modifications are needed? For an increasing number of people in this phase of their retirement—usually in their 70s—this decision-making is made more challenging by the need to continue caring for their own elderly parents.

Coping with complexity: At this point, the realities of aging are no longer theoretical. Karen is dealing with the tactical challenges of day-to-day living as health issues start to take center stage. People 65 to 69 years old take nearly 14 prescriptions per year—which increases to 18 prescriptions per year for those over age 85—and managing this complexity becomes very difficult and tiring.1 Visits to the doctor become a regular, weekly event, involving general practitioners, specialists, and pharmacists. She or her partner may need more intensive caregiving in the home for some disease or condition. For all these reasons, Karen is forced to stay closer to home; it is difficult for her to travel, even to visit her children.

Living alone: Karen is on her own after the loss of her partner, like many of her contemporaries: In the United States, 46 percent of women over 75 live by themselves.2 Her cognitive function, either due to natural aging or disease, may be decreasing. By now, many friends have passed away or moved away, and family might not be near. As her circle of support grows smaller, and the effects of aging and chronic conditions grow more acute, hiring in-home care or moving to a senior-housing or continuing-care retirement community becomes necessary. Expenses mount. About 50 percent of Karen’s lifetime healthcare costs will occur during the last six months of her life.

How plan sponsors can make a difference

Transitioning through retirement represents an admittedly dour trajectory, with steady decreases in social support, cognitive functioning, and potentially income for those who did not plan appropriately. Those nearing retirement can be forgiven for not wanting to dwell on the details. But waiting too long to plan for each stage of retirement is unwise because a sudden event can push someone into the next retirement phase unexpectedly—a fall that breaks a hip, for instance, or a disease that strikes a spouse. Plan sponsors can and should help employees confront this reality and plan accordingly.

On the financial front, employers should speak forthrightly about the specific, long-term financial risks that employees face and how each phase of retirement creates different expenses and demands on income. Health savings accounts, long-term care insurance and annuities to create guaranteed streams of income are all important elements of a retirement plan.

Plan sponsors can also provide interactive planning tools and calculators to help employees chart, evaluate and experiment with various asset allocations and investment scenarios to help them set and achieve the right goals. If employees better understand what they face ahead, learn the factors that affect their retirement savings, and have the right set of tools, they can make smarter decisions about their overall financial well-being and make the most out of each phase of retirement.

Beside investment planning, plan sponsors can help employees in other ways to think about retirement and their future lifestyle in more concrete terms. For instance, an employer could invite current retirees to talk about their decisions and experiences in retirement; it could invite representatives from local assisted living and senior-housing communities to discuss the challenges around aging; and it could invite a local architect or builder to discuss how to modify homes to make them safer for aging owners. The National Association of Home Builders actually certifies aging-in-place specialists.

Plan sponsors can also help employees near retirement by creating a Web portal that offers information about various services they’ll need in retirement, from healthcare to lawn care to car care, and explains the true costs of these services. The company might vet the providers on the site or not. But by simply giving employees a place they can find relevant information quickly, plan sponsors become a trusted resource for useful retirement information.

All these efforts will help employees face their fears and get a better grasp on their futures. With a better understanding of the four stages of retirement, employees will feel empowered to engage in better planning that will make living longer in retirement better.

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