The second half of retirement

Posted by on June 19, 2013 @ 1:00 pm in Retirement

I’ve been spending a great deal of time with 80- and 90-year-olds recently. My mom (now in her mid-80s) just moved to a new retirement community, and so it’s been a wonderful opportunity to observe older retirees in a personal way. And it’s given me some time to reflect on what I’m calling the “second half” of retirement.

When you arrive at a typical retirement community (and here I’m referring to independent living, not assisted living or nursing facilities), you encounter a wide range of physical and mental health outcomes. There are 95-year-olds who are fit and still driving. There are 75- and 80-year-olds who are frail and need personal support. Some rarely see the doctor except for routine evaluation, while others are constantly in and out of the hospital.

Another issue is declining mental acuity. Academic studies show that the rate of dementia doubles every five years in retirement, so that by your early 80s, the risk of full-fledged dementia is 3 in 10. And while you may avoid clinical dementia, you may be prone to milder forms of cognitive impairment. Contrast that with those who remain intellectually sharp through their later years.

As I’ve learned from several families, once a loved one moves to a retirement community, it’s common to gradually shift financial decision-making to trusted younger family members. I suspect many of our blog readers have had to create similar arrangements with their aging parents. The risk of course is that the designated individual, armed with limited or full powers of attorney, can mismanage the older person’s finances. It can help if caretakers conduct all responsibilities as transparently and openly as possible.

Often, selling a primary residence accompanies the move to a retirement community. Many of the retired folks I speak to are of two minds: they both regret moving out of their home and are simultaneously relieved they no longer have to deal with the responsibility of homeownership.

There’s a lesson here for those of us who are younger—don’t become too attached to your main residence as you approach retirement. And start thinking about this transition long before you need to, as well as related changes to finances and portfolios.

One issue I’ve been thinking about is how the portfolio allocation problem changes later in retirement. When you’re 60 or 65, it’s easy to think about a retirement that might last several decades or more. Your main objective is creating a regular income stream from the resources you have, and also to provide for some growth in capital to offset the rising cost of living.

Yet by the time you’ve reached your mid-80s, if not sooner, the calculus changes a great deal. Time horizons are dramatically shorter (unless you’re thinking of investing for your heirs and beneficiaries). And the analysis very much depends on your resources, living arrangements, and health circumstances.

If an older parent moves in with children, it’s possible to imagine that demand on resources will decline (e.g., free room and board) until additional care is needed. If you have the resources to move into an independent living retirement community, my own family experience is that the resources needed for retirement rise substantially. That’s not your standard model of income in retirement—boost spending by a third or more when you’re in your 80s.

Similarly, when it comes to financing assisted living or long-term care, there are two alternative paths. Those with substantial resources (e.g., greater than $1 million) will pay exclusively for private care from assets. Yet most other households will first pay for private care from assets, and then, when depleted, sign up for Medicaid, the government program that helps pay a large portion of long-term care expenses. Those of you who have been through this already know another life lesson from the second half of retirement: you need to become very familiar with your state’s Medicaid rules.

In the financial services world, we spend a great deal of time helping individuals accumulate and invest savings, and somewhat less helping them make the transition into retirement. In my own view, our thinking about decisions at much older ages remains pretty ad hoc and largely underdeveloped. As the world’s population continues to age, we need some much deeper thinking on the second half of retirement.