Saturday, January 28, 2017

The Endgame

In The Opening Game, The Middle Game, and the Endgame, I compared the structure of financing retirement to the structure of a chess game. Having covered The Middle Game in my last post, I'll describe retirement's Endgame in this one.

The Endgame is dramatically different than the Opening game. The typical retiree has changed from a mentally sharp, physically active person with many decisions ahead, many options from which to choose, and an enormous range of potential outcomes in the Opening Game to one who is typically less active, perhaps has lower mental acuity and less interest in finance, has already locked in most of the important financial decisions, and whose range of potential outcomes has narrowed. Expecting to establish a strategy at the beginning of retirement that is optimal for both of these scenarios and one between is often a fool's errand.

Following is a simplified state diagram for visualizing the narrowing of options. At the beginning of retirement, the retiree has the most options. Initially, any of the blue circle "states" are possible in the future depending on the retiree's decisions and factors beyond her control, like her health and market returns.



The retiree follows the decision path in black (below) and arrives at the Middle Game. It may help to think of each row as a year. By the Middle Game (the row with one red circle), many future outcomes (light gray) are no longer likely to be achieved. A retiree who nearly depletes his portfolio by the Middle Game, for instance, makes ending retirement at a state that includes an enormous portfolio less likely, though not impossible.

Some future states may be impossible to achieve because, for example, the retiree's Social Security claim has already been finalized or Long Term Care insurance was or was not purchased and no longer can be. Once a retiree claims Social Security benefits at age 65, for example, all future states in which the retiree claimed at a different age are no longer possible. In other words, future Social Security benefits were locked in at age 65 under current law.


The retiree's range of possible final outcomes is represented by the bottom row of the pyramid. There are fewer red circles in that row than there were blue circles in the bottom row of the Opening Game pyramid above, indicating that the range of likely final outcomes has shrunk as time passed and decisions were made.

Several more decisions bring the retiree to the Endgame, where the range of possible final outcomes and the number of available options is the smallest, yet.


One benefit of breaking down retirement into sub-games is that it enables us to consider these different life stages simultaneously. Comparing the Endgame side-by-side with the Opening Game, for example, clarifies why retirement planners often recommend delaying Social Security benefits. Households that delay claiming and live into the Endgame will have a larger floor of Social Security benefits late in life. Delaying also lowers income in the Opening Game and visualizing the two stages side-by-side provides a clearer understanding of the tradeoffs.


In retirement's Endgame, the range of possible final outcomes and the number of available options is smallest.
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I set the beginning of the Endgame at age 86, again somewhat arbitrarily. It ends when there is no surviving spouse.

The median remaining life expectancy for an 86-year old male is about 4½ more years, 6 more years for a female and 8 years for either spouse of a couple. Life expectancy has taken another significant decline from the beginning of the Middle Game.

For every 100 women who begin the Opening Game in 2017 at age 65, about 53 will survive to play the Endgame and about 13 of those will likely live to 95 or older. For every 100 men, about 41 will survive to play the Endgame with about six reaching at least age 95.

    Our physical activity will typically follow another steep decline resulting in lower discretionary spending, but we are also likely to experience higher medical costs to offset the lower discretionary spending. Typical retiree expenses will decline about 25% after 20 years of retirement, but an individual household's spending may not be typical and even for those that are typical the spending doesn't decrease smoothly. In other words, spending over time is very difficult to predict for an individual household and it's even difficult to predict year-to-year.

    We may have lost significant mental acuity by the Endgame, though I have met people in this age group who are far sharper than I. Eventually, however, that mental acuity will likely begin to fade and we may no longer be able to manage our finances or have the desire to. We should anticipate this in our retirement plans.

    Investing in stocks just before and immediately following retirement (the Opening Game) exposes us to maximum probability of depleting our savings as a result of exposure to sequence of returns risk. Investing in stocks in the Endgame can also be tricky because, though the probability of depleting our portfolio due to a poor sequence of returns has declined with a shorter life expectancy, we will now have limited time to recover from bear markets. Investing only those funds intended for our heirs, if that is possible, eliminates this problem. Investing funds we may need to live on is highly risky during this game.

    We had to claim Social Security benefits no later than age 70 (or more correctly I should say that delaying past 70 would have provided no additional advantage) back in the Opening Game. If we die before reaching median life expectancy for the age at which we claimed then we made a fortunate choice. Should we live longer, we would have been better off delaying the benefits claim. Regardless, our remaining lifetime was unpredictable and that decision was locked in during the Opening Game.

    HECM reverse mortgage [1] borrowers who spent home equity early in retirement may wish they had waited, but those who borrowed early and delayed spending may well find that their credit line now exceeds their home's market value. HECM borrowers who chose tenure payments may be well ahead of the game.

    Regardless, HECM borrowers may now need to deal with the transition out of the home, as the loan will become payable unless a surviving spouse still lives in the home.

    By the Endgame, purchasing a fixed annuity or Long Term Care insurance are no longer viable options.

    The number of elder bankruptcy filings becomes negligible in the Endgame [4]. Though bankruptcies have generally declined across the board due to changes in bankruptcy law, the percentage of bankruptcies has been lower for those 75 and older for some time.

    U.S. Bankruptcy Filing Rates per 1,000

    Age Range
    1991
    2001
    2007
    18-24
    3.9
    3.7
    1.4
    25-34
    10.2
    12.7
    5.5
    35-44
    9.3
    14.4
    6.5
    45-54
    7.3
    11.4
    5.5
    55-64
    3.5
    5.5
    4.9
    65-74
    1.2
    3.1
    2.7
    75-84
    0.3
    2.3
    1.6
    85+
    neg
    neg
    neg

    The “Tax Torpedo”, as I discussed in a previous post, can become a long-term tax problem after age 70½ and will last until retirement account balances become low enough that RMDs no longer trigger higher Social Security benefit taxation.

    Sequence of returns risk is still a risk in the  Endgame, but it may have declined significantly along with our life expectancy. (It's always a risk, but a shorter life expectancy makes it less likely that sequence risk will result in portfolio depletion.) Hopefully, the retiree has implemented a variable-spending strategy rather than having tried to spend a fixed percentage of initial savings each year. This will act to mitigate the risk of portfolio depletion over time. In my simulations, few retirees deplete their savings before the Middle Game (see Death and Ruin) but portfolio depletion accelerates at about age 85.


    The probability of outliving an investment portfolio is dependent upon the size of the portfolio, the percent of the portfolio spent annually, the portfolio's volatility, market returns, and the retiree's life expectancy. Because the retiree now needs to fund a retirement that will be on average half as long as the retiree in the Opening Game, his chances of outliving savings relative to his life expectancy have decreased (a good thing).

    On the other hand, a smaller portfolio than the retiree expected with which to begin the Endgame increases the probability of portfolio depletion (a bad thing) and, as I have stated repeatedly, we won't know how much money is left in our portfolio for the Endgame until we almost reach it. To say this differently, an older retiree with a shorter life expectancy can spend a larger percentage of his remaining portfolio value each year, but we can't predict the portfolio's future value. The question then becomes, "spend a larger percentage of what?"

    Regardless, for retirees who do reach the Endgame, fixed annuities, maximized Social Security benefits, and pensions will feel quite warm and cuddly.

    The range of possible remaining-lifetime spending costs of a shorter retirement is usually smaller (less risky) than that of a longer retirement. The monkey wrench in the spending machine is end-of-life costs, which can be huge or near zero. According to both Banerjee and Blanchett [2, 3], however, even yearly spending with high end-of-life costs are often lower than initial retirement spending in real dollars.

    We may think that end-of-life costs are a function of age but they are not. End-of-life costs don't appear in your nineties unless you live into your nineties. Lots of people die in the Opening and Middle Games and many of them will have high end-of-life costs. Actor Christopher Reeves had enormous end-of-life costs in his late forties. High end-of-life costs are a risk in all three games. They are a function of when you die and not necessarily one of age.

    Remaining life expectancy, mental acuity, decreasing options, and the unavoidable effects of Opening and Middle Game decisions make this a different game. The best strategy for the End Game can't be determined until the Middle Game is nearly over because we won't know until then what market returns, interest rates, and life have done to our resources and our cost of living.

    Updating the characteristics table to include the Endgame gives us this:



    This series of posts was not intended as a comprehensive comparison of the three games. I have only tried to establish that retirement resources, options and challenges are different enough for a 65-year old, a 75-year old and an 85-year old to warrant perhaps three separate strategies.

    Our Endgame will be affected both by immediate financial decisions we make or others make for us but also by decisions we made a decade or two earlier. This is why we need to begin retirement by, as Stephen Covey says, "starting with the end in mind." Both our time and our mental acuity will likely be shortened by the Endgame. Our resources may be dwindling and that leaves the Endgame particularly fraught.




    REFERENCES


    [1] The Mortgage is Dead; Long Live the (Reverse) Mortgage, Cotton, D., The Retirement Cafe blog.



    [2] Banerjee, S. (2012). Expenditure patterns of older Americans, 2001-2009.



    [3] Blanchett, D. (2013, November 5). Estimating the True Cost of Retirement. Morningstar. 



    [4] Generations of Struggle. Deborah Thorne (Ohio University), Elizabeth Warren (Harvard Law School), Teresa A. Sullivan (University of Michigan)


    Friday, January 27, 2017

    The Middle Game

    I suggested that retirement is similar to a chess game in The Opening Game, The Middle Game, and the Endgame. Having covered the Opening Game in my last post, I'll describe retirement's Middle Game in this one.

    Here are a couple of quotes I found at chess websites regarding the Middle Game [1].
    “[A] Principle of the middle game is to enter into a comfortable endgame.” 
    “Most of our games are decided in the middle game. Sometimes because of tactical mistakes and often because we don’t chose the right plan in the middlegame. That is why it’s immensely important to understand middlegame positions.”
    As in chess, the Middle Game of retirement has its own distinct risks and rewards. It is difficult to strategize either the chess or the retirement Middle Game until we almost reach it because our options in the Middle Game depend largely on how the Opening Game ends. How many pieces will we have remaining in play? What will their positions be? How did the market treat our investments in the Opening? How is our health? Did we lose a spouse or do we still need to plan for two?

    An important difference between the two Middle Games is that we can lose at chess in the Middle Game by making the wrong moves then, but when we lose in retirement's Middle Game it is most often the result of decisions made in our Opening Game. Retirement mistakes in the Middle Game may not show up until the Endgame. Mistakes in chess' Middle Game may entirely eliminate the Endgame. We concede the game and move on to a new one.

    There are no conceded games in retirement. Assuming we are still alive (or our spouse is), we have to play retirement's Endgame with whatever resources we have left.

    Even when we make poor retirement finance decisions it usually takes several years to deplete a portfolio. Did we invest too heavily in equities in the Opening and lose our savings to sequence risk? Did we claim Social Security benefits early and lock in lower benefits? Did we build an inadequate floor?


    We have to think about the Middle Game and Endgame during the Opening Game, and the Endgame during the Middle Game.
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    I set the beginning of the Middle Game at age 76, again somewhat arbitrarily, and repeat that the start and finish of these games are fuzzy ranges rather than specific ages. I choose age 85 as a representative end of the Middle Game. Picking a different age based on specific household conditions doesn't alter the principles.

    The median remaining life expectancy for a 76-year old male is 9 more years, 12 more years for a female and 15 years for either spouse of a couple. Life expectancy has a strong impact on retirement finances. Remaining life expectancy is dramatically lower during the Middle Game than in the Opening Game and this fact alone makes the Middle a significantly different game.

    As I previously mentioned, about 7 of 10 Americans born in 1952 will live to age 65 in 2017 to play the Opening Game. The following diagram shows how many women and men age 65 in 2017 are likely to live to each game beginning at about ages 75 and 85, and very old age 95. The areas of the circles are proportional to the number of survivors.


    Our physical activity is typically much lower beginning with the Middle Game and this may mean lower living expenses as, for example, we travel less. Typical retiree expenses will decline about 15% after 10 years of retirement, but an individual household's spending may not be typical and even for those that are typical the spending doesn't decrease smoothly.

    Investing in stocks in the Middle Game may still be wise because you might have several years of life remaining, depending on your household's unique financial circumstances. But, if you manage your own investments you should prepare for a likely decline in mental acuity and perhaps a waning interest in managing money as the Middle Game progresses.

    We had to claim Social Security benefits by age 70 (or more correctly I should say that delaying past 70 would have provided no additional advantage) back in the Opening Game. If we die before reaching median life expectancy for the age at which we claimed then we made a fortunate choice. Should we live longer, we would have been better off delaying the benefits claim. Regardless, that decision was locked in during the Opening Game.

    The real risk of reverse mortgages is that a retiree will spend most of her home equity early in retirement and then be forced to repay the mortgage because she can no longer afford the home. A HECM reverse mortgage guarantees only that the loan will not come due so long as the borrower or a spouse continues to live in the home. It does not protect a borrower who decides to move out because he or she can no longer afford the home.

    By the time a retiree reaches the Middle Game, she will likely have a better idea where she will want to spend the rest of her life and whether a reverse mortgage fits those plans. She will also have a better handle on her financial situation than she would have had if she had borrowed in the Opening Game. And, she may have a greater need for that home equity than she had in the Opening Game. Spending a reverse mortgage is a less risky proposition in the Middle Game.

    At some point around the middle of the Middle Game, purchasing a fixed annuity will become a less viable option. Also, because Long Term Care insurance requires medical qualification it may no longer be a viable option. In fact, medical issues can be a disqualifying factor even in the Opening Game.

    Elder bankruptcies decline in the Middle Game [4]. Though bankruptcies have generally declined across the board due to changes in bankruptcy law, the percentage of bankruptcies has been lower for those 65 and older for some time.


    U.S. Bankruptcy Filing Rates per 1,000

    Age Range
    1991
    2001
    2007
    18-24
    3.9
    3.7
    1.4
    25-34
    10.2
    12.7
    5.5
    35-44
    9.3
    14.4
    6.5
    45-54
    7.3
    11.4
    5.5
    55-64
    3.5
    5.5
    4.9
    65-74
    1.2
    3.1
    2.7
    75-84
    0.3
    2.3
    1.6
    85+
    neg
    neg
    neg

    ("neg" = negligible)

    Of course, forced retirement is no longer a huge risk in the Middle Game because nearly everyone will have retired by then.

    The “Tax Torpedo”, as I discussed in the previous post, can become a long-term tax problem after age 70½ and may well last all through the Middle Game and beyond. Avoiding it requires actions in the Opening Game, like spending down IRA's or executing Roth conversions.

    Sequence of returns risk is still a risk in the Middle Game, but it may have declined significantly along with our life expectancy. (It's always a risk, but a shorter life expectancy makes it less likely that sequence risk will result in portfolio depletion.) Hopefully, the retiree has implemented a variable-spending strategy rather than having tried to spend a fixed percentage of initial savings each year. This will act to mitigate the risk of portfolio depletion over time. In my simulations, few retirees deplete their savings before well into the Middle Game (see Death and Ruin).


    Because the retiree now needs to fund a retirement that will be on average half as long as the retiree in the Opening Game, his chances of outliving savings have diminished along with his chances of amassing a huge portfolio to leave to heirs. Shorter retirements have a smaller range of possible outcomes.

    The same logic applies to a large degree to spending. The range of possible spending costs of a shorter retirement is usually smaller than that of a longer retirement. The monkey wrench in the spending machine is end-of-life costs, which can be huge or near zero. According to both Banerjee and Blanchett [2, 3], however, even yearly spending with high end-of-life costs are often lower than initial retirement spending in real dollars.


    We may think that end-of-life costs are a function of age but they are not. End-of-life costs don't appear in your nineties unless you live into your nineties. Lots of people die in the Opening and Middle Games and many of them will have high end-of-life costs. Actor Christopher Reeves had enormous end-of-life costs in his late forties. High end-of-life costs are a risk in all three games. They are a function of when you die and not necessarily how old you are.

    According to health economist Austin Frakt [5], typical retirees in the Middle Game will spend about twice as much on health care as those in the Opening Game.

    Remaining life expectancy and the unavoidable results of Opening Game decisions make this a different game. The best strategy for the Middle Game can't be determined until the Opening Game is nearly over because we won't know until then what market returns, interest rates, and life have done to our resources and our cost of living.

    Updating the characteristics table to include the Middle Game gives us this:


    As in chess, the primary objective of the Opening Game in retirement finance is to set up a winnable Middle Game. The best strategy for a retired household's Middle Game will depend largely on how well they were positioned coming out of the Opening Game and they won't know that until they get there. That position will be the result of decisions made in the Opening Game, like Social Security claiming and spending decisions, and luck, like health, mortality, and market returns.

    Decisions made during the Middle Game will also affect the Endgame. These include the decision to spend a reverse mortgage, how we will invest and how much we will spend discretionarily.

    An objective of the Middle Game is to set up the Endgame, but some of the Endgame is set up during the Opening Game, like claiming Social Security benefits and building a floor. That means we have to think about the Middle Game and the Endgame while playing the Opening Game, and the Endgame while playing the Middle Game.

    Luck plays a very limited role in chess, but a much greater role in retirement. Retirement is more like backgammon in that respect, part skill and part luck, but that's a different post.




    Health economist Austin Frakt says, "Technology change is responsible for at least one-third and as much as two-thirds of per capita health care spending growth." Blame Technology, Not Longer Life Spans, for Health Spending Increases.


    REFERENCES


    [1] Chess Improvement, Middle Game Training



    [2] Banerjee, S. (2012). Expenditure patterns of older Americans, 2001-2009.



    [3] Blanchett, D. (2013, November 5). Estimating the True Cost of Retirement. Morningstar. 



    [4] Generations of Struggle. Deborah Thorne (Ohio University), Elizabeth Warren (Harvard Law School), Teresa A. Sullivan (University of Michigan)



    [5] Austin Frakt, Blame Technology, Not Longer Life Spans, for Health Spending Increases.


    Friday, January 13, 2017

    The Opening Game

    In my previous post, The Opening, the Middle Game and the Endgame, I compared retirement to a game of chess that can be broken down into three distinctive game phases. Like the three stages of chess, the three stages of retirement have different risks and opportunities. It is very difficult in either chess or retirement to predict what your position will be at the beginning of the next phase until you are almost there.

    The opening game typically begins around age 65 to 70, depending on when the worker retires. It can begin earlier if the retiree is one of the 50% or so who reports that they were forced to retire earlier than planned (see The Risk of Retiring (or Being Retired) Early ). About 7 in 10 Americans born in 1952 have lived to reach age 65 in 2017, according to the Social Security Administration [1].

    The opening game lasts until about age 75, though this is my own somewhat-arbitrary break point and depends on individual household situations. The beginning and end of the three games are fuzzy ranges, not specific ages.

    The table below shows the median remaining life expectancy in 2017 for a male, female or at least one spouse of a couple, all age 65. The second column shows the 5% probability that these will live even longer. For example, about half of females age 65 today will live to age 86 and about 5% will live to age 99.

    Remaining Life Expectancy (Years) at Age 65
    Median 5% Probability
    Male 18 30
    Female 21 34
    Either 24 35

    The opening phase of retirement is when retirees tend to be most physically active. For example, as I have mentioned previously, airlines report that Americans stop traveling internationally around age 70 and domestically around age 80. This decline in activity may also mean a decline in spending.

    David Blanchett and Sudipto Banerjee have reported in multiple studies that spending typically declines about 1.5% per year throughout retirement and that spending late in retirement is typically lower than that at the beginning of retirement even when large end-of-life expenses are experienced. So, the opening of retirement may be the most expensive of the three games. Not all households will experience this decline, however, and it is very difficult to predict for an individual household.


    Key risks of the Opening Game include forced retirement, the “Tax Torpedo”, and sequence of returns risk. (For other risks, see Why Retirees Go Broke).


    The three stages of retirement have different opportunities and different risks.
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    About half of recent retirees report that they were forced to retire sooner than they had planned to take care of a relative, as a result of age discrimination, as a result of layoffs or for other reasons. The decade before retirement has a large impact on retirement finances and retiring sooner than planned can be devastating.

    The “tax torpedo” [4] is the name given to the scenario in which other income, like Required Minimum Distributions (RMDs) from your retirement accounts, forces more taxation of your Social Security benefits. Depending on your income and marital status, up to 85% of your Social Security benefits can become taxable. These RMDs must begin at age 70½ and this tax increase can take a substantial bite out of your Social Security retirement benefits.

    Sequence of returns (SOR) risk is the risk that a series of poor market returns early in retirement can result in a retiree's savings being depleted earlier than planned. Poor returns later in retirement have less impact on the survivability of invested retiree savings and this risk declines exponentially throughout retirement. That means that the Opening Game is the phase of retirement when a series of poor portfolio returns can have the greatest negative impact on future retirement finances.

    A retiree who experiences these poor returns early in retirement isn't likely to deplete her savings during the Opening Game. In fact, my SWR studies show that portfolio depletion with a reasonable spending rate of about 4% or less rarely occurs before the retiree's median life expectancy at age 65. (See Death and Ruin.) In other words, a series of poor returns that occurs in the Opening Game won't deplete savings until the Middle Game, assuming spending is somewhat reasonable. Spend 10% of your savings annually, however, and you can deplete your portfolio pretty quickly.


    Sequence risk is also very high during the decade preceding retirement. Many households who believed they were all set for retirement in 2000 to 2006 encountered a dramatic setback when the Great Recession hit in late 2007. Many had to postpone or scale back their retirement plans. In my previous post, I mentioned the transition into the Opening Game (obviously not a feature of chess). That's a good time to reduce equity exposure to mitigate the risk of losing capital with little time to recover before retirement – you probably should have reduced your equity exposure before the Opening Game.

    Several key decisions in the opening game also affect later games including claiming Social Security benefits, spending a reverse mortgage, purchasing a fixed annuity, and purchasing long-term care.

    Claiming Social Security benefits is an excellent example. Claim benefits early and you increase Opening Game income but decrease income in later games – should you live that long. Likewise, borrowing from a reverse mortgage in the Opening Game will increase spending immediately but you might have an even greater need for that spending in later games – should you live that long.

    Purchasing a fixed annuity will cost more in the Opening Game because you have a longer life expectancy. On the other hand, delay too long and you may have significantly less capital with which to purchase an annuity. At some age approximately halfway through the Middle Game, buying a fixed annuity may no longer be economically sound.

    Long-Term Care insurance policies require that you qualify medically. Wait too long to purchase one and you may no longer qualify.

    Health  care expenses typically increase after we retire. According to health economist Austin Frakt [5],
    "Older people need more health care, and they spend more. Compared with the working-age population (people 19 to 64 years old), those 65 to 74 spend two times as much; those 75 to 84 spend four times as much; and those 85 and older spend six times as much. And the growth in health care spending is faster for retirees than for younger Americans."
    These decisions have both “expiration dates” and impacts on future games that are both good and bad in addition to the immediate impacts they have on the Opening Game. Decisions need to consider the impacts on all three games in a good retirement plan.

    The following summarizes the salient characteristics of retirement's Opening Game:


    The Opening Game has its own risks and rewards and decisions made in early retirement can have a dramatic impact on later games. A good retirement strategy will not only consider the impacts of decisions on the Opening Game but also impacts on later games. Plan with the understanding that the three games are different, that each may require its own strategy, that decisions may affect more than the current game, and that you won't know what pieces are still in play until you almost reach the next game.

    In my next post, I'll move on to the Middle Game.


    REFERENCES

    [1] Life Tables for the United States Social Security Area 1900-2100. SSA,gov.


    [2] Blanchett, D. (2013, November 5). Estimating the True Cost of Retirement. Morningstar.


    [3] Banerjee, S. (2012). Expenditure patterns of older Americans, 2001-2009. EBRI Issue Brief, (368).


    [4] The Tax Torpedo explained, Kiplinger.


    [5] Austin Frakt, Blame Technology, Not Longer Life Spans, for Health Spending Increases.



    Friday, January 6, 2017

    The Opening, the Middle Game and the Endgame

    To quote a website devoted to chess [1]:
    Your strategy in a chess game depends on knowing the phase of the game that you're in. The three basic phases are the opening, the middle game, and the endgame. The correct transition from one phase to another can mean the difference between a win and a draw – or a draw and a loss.”
    Although many retirement planners frame retirement planning as a single “game” (buy an annuity, claim Social Security benefits late as you can and don't spend more than 4% of your savings annually), planning is better framed as a chess game with an opening, a middle game, and an endgame.

    The risks are different in each of these games, as are the opportunities for income and the costs. Our level of physical activity declines over time. Airlines report that Americans stop most international travel by their early seventies and most domestic flights by their early eighties.


    Retirement has an opening, a middle game and an endgame. Plan accordingly.
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    Mental acuity may differ significantly in each game. Our interests and our family structures change with time as does, of course, our remaining median life expectancy. Our savings may grow as we hope they will, or they may shrink as we age.

    These key characteristics of retirement finance change as retirement progresses and create what are essentially distinct phases – early retirement, mid-retirement and late retirement – that require unique strategies. A single retirement finance strategy is unlikely to be optimal in all three stages. Because we can't predict the future with any accuracy we won't be able to establish these strategies firmly until we reach the transition periods preceding them. We can, however, “pencil in” our best guess for now and change our plans as warranted.

    To complicate planning, some important decisions must be made in early retirement whose impacts won't be felt until later stages. We have to decide by age 70 at the latest, for example, when to claim Social Security benefits. That decision's results may not be felt until late retirement but the decision itself must be made in early retirement.


    We won't be able to postpone the decision to purchase a fixed annuity forever, either. At some point they will no longer make sense. One has to medically qualify for Long-Term Care insurance and this is harder to do than most people think. Postpone the decision to purchase LTC insurance for too long and you might no longer qualify.

    The results of a decision to borrow a reverse mortgage early in retirement instead of postponing spending home equity may likewise not be felt until late retirement. So, while it would be ideal to make all mid-retirement or late retirement strategy choices just before we reach those stages, a few will already be set in stone by then.

    One of the counterintuitive things I learned as a business executive was "Don't make a decision until you have to." That sounded like procrastination, but it isn't procrastination because sometimes you have to make a decision quickly. At other times, postponing a decision as long as you can allows you to gather new, relevant information that affects the decision and moving too quickly just means you make that decision without all the information you might have had.

    It's better to postpone a decision to cross a street, for example, until you reach the intersection and assess the situation.

    Various retirement decisions have different deadlines. You will have to make a Social Security claiming decision by age 70 to maximize lifetime benefits. On the other hand, you don't have to decide at age 65 what your asset allocation will be if and when you reach age 95. There is no advantage to locking in your age-95 asset allocation at age 65, in fact there is a disadvantage.

    (I am taken aback when someone age 65 tells me that they have decided on an increasing-equity glide path. Shouldn't you wait until you're older and see if you still have money to invest and how much risk you can take?)

    The strategy I suggest to win the retirement finance game in three stages is this:

    1. Plan in three separate stages because each of the three games is significantly different from the other two and requires its own strategy.

    2. Plan your complete retirement future "in pencil" with the best guesses you and your planner can make about future stages. But, understand that this plan is a work-in-progress that will need to be changed over time as your financial situation changes.

    3. Initially, develop plans for future stages that will work under a broad range of conditions because you cannot predict what your financial situation will be when you reach them. Refine those plans as you age and your likely future scenarios begin to come into better focus.

    4. Postpone most decisions as long as you can. These include decisions like asset allocations and spending rates that can and probably should change annually, reverse mortgages, fixed annuity purchases and claiming Social Security benefits. At the same time, be aware that some decisions have an "expiration date." Postpone purchasing LTC insurance too long and you may no longer qualify medically.

    5. Pay particular attention to decisions you must make in early stages that may have a large impact on later stages. Claiming Social Security benefits is an excellent example.

    6. As you approach the transition to each new stage – including the first – review and revise your retirement plan to reflect the financial situation in which you find yourself.

    7. Assume you will reach the endgame.

    I'll talk more about these three games in future posts, beginning with The Opening.

    Happy New Year!





    Be aware that if you have a high-deductible health insurance plan and will claim Medicare in 2017 your HSA eligibility will end when your Medicare coverage begins. That means you will likely need to pro-rate your 2017 contribution to avoid tax and a penalty [2].

    Also, be aware that Obamacare allows you to cover a child on your own health insurance policy until he/she reaches age 26, but they cannot be covered by a Health Savings Account (HSA) unless you can claim them as a dependent on your Federal tax return. [3] If either of these applies to you, contact your tax preparer before making this year's HSA contribution.


    REFERENCES

    [1] Chess for All Ages.


    [2] Medicare.gov What happens to my HSA when I sign up for Medicare?


    [3] HealthEquity HSA Handbook (downloads PDF)