Planning for the 3 Stages of Retirement

As the 2020 Ford GT rolled off the delivery truck, Joseph Reyes, CFP^®, CWS^®, CTFA, AAMS^®, a senior financial planner at Schwab, was beyond excited. Owning the luxury car, made famous in the 1960s for its rivalry with Ferrari, had been a lifelong dream.

Not his dream—Joseph was watching a video sent by a longtime client. "He wanted to build his retirement around cars, and I worked with him for years to make it a reality," he recalls.

This was one of innumerable retirement plans Joseph had helped to create, each one starting with the same simple question: "What's going to excite you?" He's heard all manner of answers over the years: buying a house on the beach, owning a food truck, reconnecting with family, traveling with a camper van, and more.

Of course, just as there isn't one vision for a post-career life, neither is there a single financial plan that will see you through not just your go-go years, during which you can hopefully live out your answer to Joseph's question, but also the slow-go and no-go years—when you may need to curtail your activities due to age or health concerns.

"Unfortunately, nobody has a crystal ball," says Wendy Farrissey, CFP^®, CTFA, a senior financial planner at Schwab. "But what we do have is the ability to anticipate potential future needs, so your plan can be well positioned to weather changing circumstances."

The go-go years start at retirement with two main challenges: transitioning from saving to spending and realizing those retirement dreams.

"The first financial question in retirement is how to replace your steady income to cover essential expenses," Wendy says.

The answer: Create a "retirement paycheck," also known as a regular withdrawal strategy. Ideally, recurring expenses should be covered by predictable income. That generally means some combination of Social Security, a pension, and perhaps even an annuity, along with other forms of fixed income, like corporate or government bonds.

Your income might also include something unexpected in retirement: an actual paycheck. "In the go-go years, it's not uncommon for people to return to work," Wendy says. This is known as "unretirement," and can mean doing part- or full-time work, or even starting a new business. (According to one AARP study, nearly a quarter of retirees feel they left the workforce too soon.¹)

"I try to emphasize that retirement is really a transition," Joseph says. "It doesn't necessarily mean you stop working; it just means you have more control over how you spend your time, whether it generates income or not."

If you do end up drawing a salary in retirement, your plan needs to account for that. For example, if you're younger than "full retirement age"—between 66 and 67, depending on birth year—any outside earnings could temporarily reduce your Social Security benefit until you fully retire (at which point your benefit will be recalculated to compensate for the earlier reduction). And no matter your age, additional income could result in higher Medicare premiums or push you into a higher tax bracket.

In addition to necessary expenses, you'll also need to fund your dreams—otherwise known as discretionary spending, which tends to peak during this phase of retirement. "Typically, your health is good and therefore so is your appetite for hobbies and other activities," Wendy says. In fact, 60- to 69-year-olds anticipate devoting the bulk of their discretionary spending to travel in the coming year, according to AARP.²

That's why the go-go years require what Joseph likes to call a "thriving budget," part of which might come from your retirement accounts. Making these withdrawals can prove surprisingly difficult after decades of assiduously socking money away.

"It requires a sea change in your mindset," Joseph says. "However, the fact is you'll need to get into the habit of withdrawing funds anyway since the IRS mandates required minimum distributions [RMDs] from tax-deferred retirement accounts starting at age 73 or 75, depending on birth year. It can be advantageous to learn that process early and draw down those accounts, because having large RMDs can lead to higher taxes or other unwanted consequences."

Financial planners typically estimate go-go years lasting 10 to 15 years, "though as health outcomes improve, this phase could conceivably last much longer," Joseph says. A good retirement plan stress-tests for longevity and other factors, so you can be reasonably confident that your go-go spending won't compromise the money you'll need later.

While the three acts of retirement are a useful planning framework, it's important to regard them as a thinking tool, not a rigid timetable or set schedule.

How quickly you move through these phases depends on intensely individual factors: health, heredity, and circumstance. And movement doesn't go only in one direction. A Yale University long-term study of people over age 65 found that 45% improved cognitively, physically, or both over 12 years. The notion that later life is a time of inevitable and universal decline needs updating, the researchers concluded.⁹

So, even though retirement is when a life of financial planning comes to fruition, changes in health, spending, and your near- and long-term goals extend beyond that milestone. Annual or biennial check-ins with a financial planner remain one of the best ways to stay on track, with more frequent meetings when you face significant changes.

"It's important to know you have somewhere to go when these things come up," Joseph says. "You're not alone."