Study from the Society of Actuaries suggests that retirees should plan for 3 distinct stages of retirement

In a recent study, “Three Phases of Retirement and Planning for the Unexpected,” the Society Of Actuaries (SOA) identified three stages of retirement and offered advice on how to prepare for each stage of retirement.

The SOA said that retirement is often depicted as life on the golf course, holidays with the grandchildren, and traveling to exotic locales. It may be, but only in its first phase. Phases two and three also exist and it’s in those phases that retirees experience reduced physical and mental capacity.  

“People prepare for Phase 1 because that’s what they think retirement’s going to be – leisure time, golf and travel,” says Andrew Peterson, SOA staff fellow. “You don’t plan for the risk of that second and third phase where you have reduced physical and mental capacity. There’s a disconnect between retirees’ expectations and the reality,” Peterson says.

The SOA defined the phases this way:

Phase 1: Retirees are in good health. If they’ve saved money, they may travel, remain physically active and see this as a time “to fulfill their dreams.”

Phase 2: Because of health problems, physical activities become limited and additional medical costs may be incurred.

Phase 3: A decline in mental and physical health means a substantial amount of assistance may be needed, including expensive nursing-home care.

How can you prepare for the financial risks of Phases 2 and 3? The SOA suggested:

  1. Immediate annuities: These pay a specified amount of income for life.
  2. Longevity insurance: This type of annuity doesn’t start to pay benefits until a person reaches an advanced age, usually 85.
  3. Long-term care insurance: This can help you and your spouse maintain financial independence through Phases 2 and 3 by paying for nursing home care and in-home care.

The SOA also advised retirees and those nearing retirement to limit stock market exposure. Financial advisers always point out that stocks “do better in the long run,” but older people may not have the time to recoup losses from a nasty downturn like we’re experiencing today.