The Importance of Planning for Mid-Retirement

By: Brian Perlman

Because the cost of retirement in America today is unpredictable, planning for such a significant stage in one’s life can be an extremely difficult and complex task. The length of our lives in retirement and the long-term care we require over the years may vary. A number of financial products have been developed to help people cope with the uncertainty of retirement and the high costs of nursing care and living beyond average life expectancies. But these products tend to target the years just before death or the first few years of retirement, when people are healthy enough to travel, spend time with family, and enjoy a range of activities they eagerly looked forward to during their working years.

But with too many planning solutions focused on immediate and late retirement, the industry overlooks the frequent financial challenges that often occur between these two periods. Mid-retirement is a deceptively lengthy phase in which many retirees feel secure in their abilities to meet the financial demands they may encounter—even though in reality, they navigate these middle years woefully unprepared.

Overconfidence & Incoming Obstacles
Recent Risks and Process of Retirement Surveys from the Society of Actuaries (SOA) reveal that retirees are likely to feel confident about their finances in retirement, notwithstanding concerns of some risks such as requiring long-term care. In fact, nearly nine in ten retirees believe they are faring the same or better now than they thought they would when they retired. This could be because many have learned how to manage their cash flow and spend less money as they become less active.

Greenwald’s research suggests there is a substantial challenge in retirement that most people do not thoroughly consider or prepare for: the initial decline in health and vitality that occurs before full long-term care is needed. This can include losing the ability to drive at night or drive at all, experiencing difficulties maintaining the home, having trouble safely climbing stairs, or even needing extra support in handling finances. These problems, of course, do not rise to the level of necessitating long-term care for quite some time; many of those in mid-retirement can still manage most daily living activities on their own.

Retirees can overcome mid-retirement health-related obstacles in several ways, but efforts to address them—such as shifting to an assisted living situation—can result in costly outcomes and a shocking change in the spending curve, perhaps for the first time during retirement. This means that retirees who have become skilled at balancing income and spending are all of a sudden confronted with unexpected new expenses. Common solutions to health-related obstacles currently include:
• Higher dependence on children if available, willing, and able
• Higher spending on support to accomplish certain activities
• Higher housing costs through renovation, moving, or housing type changes

Improving the Planning Process
The impact of added expenses in the middle period of retirement depends a great deal on the level of support that family provides, whether physical or financial. Most children do not provide financial assistance to their aging parents, but they can offer help by maintaining the residence, providing transportation, or sharing responsibilities with aides to limit their hired hours and make care more affordable. Greenwald’s research with elderly Americans shows that this support is particularly salient when there are multiple children who reside nearby.

Despite the critical importance of family care throughout retirement, it is often not factored into the planning process. Many pre-retirees and retirees do not have detailed discussions about the role children will play in facilitating their safe and healthy future. SOA has found that eight in ten people believe they cannot rely heavily on their family to help them out later in life. This may be because they do not have children who live close, but the lack of planning we observe for mid-retirement suggests a number of retirees simply do not know for sure.

The financial planning process could be greatly improved if people approaching retirement discuss these issues with their children, consider the potential need for alternative housing, and factor in the role of technology to determine available options. Aging adults who are still healthy must learn to anticipate and properly prepare for increasing expenses. Better planning will make the transition into later life smoother and contribute to a more fulfilling, financially secure retirement.

If you’re interested in discussing how to help your clients better plan for unexpected expenses in retirement, contact us.