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Budgeting for three phases of retirement keeps spending on track

In the two years since John Green has been retired, the Vancouver resident and his wife have travelled across parts of Europe, England, the western United States and have taken an Alaskan cruise – and they're not done yet. Next year it's England again to visit relatives, and Ireland.

Mr. Green is also pouring extra money into his lifetime hobby of model railroading, which includes a replica of the Kettle Valley Railroad from the B.C. Interior in the mid-1950s.

Retirement hasn't turned Mr. Green into a spendthrift. Instead, his plan is to use up a little more of his nest egg in his early retirement years while he's healthy and mobile.

"You have to do it while you've got it – and that applies to money and the physical ability to go," says Mr. Green, 67.

He and his wife, Sharon, 60, have seen friends immobilized due to “silly accidents” and watched their parents slow down with age.

“We are dipping into savings to take advantage of travel, develop those memories in the early years of retirement,” Mr. Green says.

Mr. Green is in what experts describe as the first of three stages of retirement, in which spending is typically high. Retirees, unshackled from daily working life, tend to enjoy their new-found freedom through increased travel and spending on hobbies in which they can more fully indulge.

Spending generally recedes in the second stage of retirement: As the body slows and the desire for travel wanes, there are fewer opportunities for consumption.

Costs creep up again in the third phase, in which seniors may become physically or mental impaired. At this stage, their medical costs may start to soar, including the potential for requiring long-term care homes.

Michael Stein, author of The Prosperous Retirement, popularized the concept of a three-stage retirement by characterizing them as the “Go-Go years,” “the Slow-Go years” and the “No-Go years.”

Personal finance experts say retirees need to plan their budgets for the possibility of making it through all three stages, while still taking advantage of their healthiest years.

“Make the most of that first stage because it won’t last forever,” says Fred Vettese, chief actuary of human resources consulting firm Morneau Shepell and co-author with Finance Minister Bill Morneau of the 2013 book The Real Retirement: Why You Could Be Better Off Than You Think, and How to Make That Happen.

That means spending a bit more of that hard-earned money in the first stage, instead of assuming that income needs will be the same throughout retirement, he says.

“You’ll need less money that you think you will,” especially in the later years, says Vettese, whose work challenges the traditional personal finance messaging that Canadians aren’t saving enough for retirement.

Even the final stage of retirement, for those who get there, may not be as costly as many fear, he says.

“The additional amount of money you need to take care of long-term care doesn’t end up being as much as you think it is,” says Vettese, an argument he lays out in his upcoming book, The Essential Retirement Guide: A Contrarian’s Perspective.

Those who do require the services of a long-term care home also have a choice of how much they want to spend, which today can range from roughly $2,500 a month to more than $6,000. What’s more, seniors in long-term care homes usually only need this type of around-the-clock care for a short period of time.

“You want to make some allowance for long-term care but I wouldn’t get too stingy with spending,” adds Vettese, noting that other spending will drop off. “We want to focus our spending during the good years.”

To help make retirement portfolios last through each phase, retirees should set realistic budgets based on how low-key or extravagant their retirement dreams are, says Dennis Tew, senior vice-president, Franklin Templeton Investments.

Mr. Tew says retirement portfolios should be divided into three buckets that consider the three stages of retirement: The first is the “consumption bucket,” with low-risk income-producing investments that help cover such expenses as taxes and utilities spanning about a three-to-five year period.

The second is the “longevity bucket,” which includes more growth-oriented investments such as stocks and bonds.

“That’s your inflation hedge, where you have to grow you assets faster than your costs are going up, to cover you off for the next 15 years or so,” Mr. Tew says.

The third is what he calls the “inter-generational bucket,” which is there to protect the longevity bucket and potentially leave money behind for the next generation or to charity. Mr. Tew says these investments can include more risk to provide a growth profile.

Seniors who have a long-term financial plan heading into retirement are often much less stressed about making their money last, Mr. Tew says.

“People are way more concerned if they don’t have a plan and haven’t started saving,” says Mr. Tew. “Make your life easier by starting the process early.”

Mr. Green says his retirement portfolio includes earnings from defined-benefit employer pensions. He and his wife also use a financial adviser to direct their investment decisions.

“Our portfolio is conservative, mostly in safer investments with some stocks,” says Mr. Green.

It’s an asset mix that allows Mr. Green and his wife to keep planning their trips around the world, and also keeps his model railroad on the track.

All photos by Ben Nelms for The Globe and Mail


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