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

("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.


[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.


  1. Dirk -

    I very much enjoy your blog, and your current 3-part game analogy. I am also a participant in the reverse mortgage industry.

    I feel that your comment in the paragraph beginning with, "The real risk of reverse mortgages is..." unfairly places the onus of the risk on the reverse mortgage itself when in fact the risk mentioned is one associated perhaps with its inappropriate use. The implication appears to be one might want to steer clear of a HECM because one might miss-use it, or a change in one's circumstances may render a usage decision that appeared prudent at the time unfortunate later.

    If the implication of the warning is to not spend one's home equity in frivolous ways, I could not agree more. If, on the other hand, there is a real need for the funds then the consequences of those funds not being available later must be weighed against that need at the point of the usage decision.

    I would suggest that this is not a reason to avoid positioning home equity for possible use via a HECM (as some might interpret the words, "The real risk..."), but rather to consider carefully one's decision on how to use it.

    1. This comment has been removed by the author.

    2. The idea of putting the blame for retirement failure on a financial product of any kind is irrational. I have never implied that anyone should steer clear of a HECM because it might later prove to have been a poor decision.

      A HECM borrower should thoroughly understand the household's risks of borrowing and if that risk is acceptable then he/she should borrow the money.

      One of those risks is that the borrower will encounter financial difficulties late in retirement and no longer be able to afford to live in the home after most of the equity is spent. If that risk is acceptable for a particular household then they should accept it. A good retirement planner will consider the risks of the overall retirement plan.

      My advice is to discuss with a retirement planner whether a reverse mortgage fits into one's overall retirement plan and how it fits before approaching a loan originator.

      Your characterization of my writings on the topic are not accurate.

      For the record, I have a standby reverse mortgage but no plans to borrow from it.

  2. Once again an excellent post Dirk!

    A subset of your broader concept of game phases for couples, is what I describe to couples as the 3 Phases of retirement.

    Most people focus on just Phase I (they’re both here): Retirement Income: how can they maximize their income?

    Decisions they make in Phase I affect couple’s Phase II (only one is here): Survivor Income. This is the phase many couples recognize that they have made Phase I mistakes. For example, Social Security has an automatic pay cut built in for either survivor – the lower benefit goes away. For those couples with pension decisions, only the 100% Survivor option doesn’t involve a pay cut for the survivor. The question for Phase II planning DURING Phase I is what is the plan as to how to replace that lost income for either as the survivor? Set aside assets so they’re not included in Phase I income? Life insurance (pops in specifically as an asset when needed (unless term life chosen and the term expired before insured did)? Reverse mortgage or deferred income annuities may also be a part of the plan. Or, develop a plan where the survivor consciously knows they must downsize spending. This paragraph is longer because THIS IS THE PHASE most couples gloss over without thinking through what the plan should be.

    Phase III – you guessed it – neither is here: Estate Planning. Being sure the estate plan is developed and then reviewed once in a while … not so much from the person’s beneficiary perspectives, etc., but from a lawyer review making sure that changes in law, legal precedents, or interpretations of language haven’t changed suggesting documents should be updated to reflect such things people don’t typically know about unless getting advice and insight from those deeply involved in the practice of probate law.

    The phases may appear to be the same as your game phases. I think the game phases you describe are broader in scope since they include other aspects of retirement beyond income planning for couples. My 3 phases are a subset, but still important to put the focus for couples on being sure Phase I decisions don’t adversely affect Phase II consequences of those decisions, and that Phase III is kept up to date.

    I’m looking forward to the Endgame (your post, not in life)!

    1. Excellent suggestion. You break down retirement functionally while I break it down chronologically. A valid and enlightening approach. Thanks!