“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.
[Tweet this]Retirement has an opening, a middle game and an endgame. Plan accordingly.
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:
- Plan in three separate stages because each of the three games is significantly different from the other two and requires its own strategy.
- 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.
- 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.
- 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.
- 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.
- 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.
- Assume you will reach the endgame.
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 .
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.  If either of these applies to you, contact your tax preparer before making this year's HSA contribution.
 Chess for All Ages.
 Medicare.gov What happens to my HSA when I sign up for Medicare?
 HealthEquity HSA Handbook (downloads PDF)