Understanding the three phases of retirement

Retirement is often viewed as a new chapter in your life, but it’s typically not just one chapter. These years are often divided into three very different phases.

A great many retirees—though not all—go through the active, slowdown and inactive phases, sometimes called the go-go, slow-go and no-go phases.

The active phase: retirement to age 75

When you’re younger, you may imagine retirement as a time when life slows down. That will likely happen eventually, but there isn’t a sudden switch when retirement arrives. You spend your initial years as a retiree as healthy and energetic as you were before retirement. The difference? Now you have the time to fulfill your dreams and enjoy new adventures. For most people, this is the phase when you need more retirement income to support your desired lifestyle.

Some retirees find it difficult to switch from decades of saving to spending freely, especially knowing they may need to fund a retirement lasting 25 years or longer. This concern is understandable, and we can show projections of future retirement income to help a retiree make the right spending decisions for their situation.

The slowdown phase: ages 75 to 85

Although everyone ages differently, many retirees reach a stage when they’re less active, due to health conditions, mobility issues or decreasing energy levels. Retirees may replace much of their travelling and other expensive activities in favour of enjoying hobbies and pastimes and spending time with family and friends. Often, this phase requires less retirement income.

Some retirees may also be able to give themselves an easier time financially by downsizing their home, resulting in a sizable gain that can help provide future retirement income.

A retiree may want to give a cash gift to a family member, perhaps to help purchase a first home, but may not have made the gift yet because they’re concerned they’ll need the money to fund their later retirement years. By this phase, they may be better able to determine if they can safely give an early inheritance.

The inactive phase: ages 85 and over

Financially, the inactive phase generally goes one of two ways. Retirees can experience an even slower version of the slowdown phase with no increase in cost of living, or require personal or nursing assistance because they’re no longer able to take care of themselves. Both home care and living in a facility that provides care can be expensive. Almost three in 10 Canadians aged 85 and older live in a retirement home, long-term care home, seniors’ residence or other supportive housing.¹ If you don’t have long-term care insurance, it’s prudent to keep a sizable proportion of investments in low-risk, liquid assets to cover any health-care costs.

In the case of a couple, the most significant wealth planning changes may occur when a spouse passes away. The widowed spouse will need to revisit their tax and estate plan and perhaps adjust their portfolio’s asset allocation.

Planning considerations

You start planning for the three phases of retirement well before you retire. Here are two important considerations that can help you manage potential risks.

Preparing for the active phase. Generally, but not always, retirees draw more income to support their lifestyle in the years from 60 or 65 to 75 than in the years from 75 to 85. What would happen in the active phase if a plummeting market forced a retiree to draw income from investments that lost value? They might need to reduce the amount they withdraw to help ensure they won’t outlive their savings—giving them less money to spend enjoying the first phase of their retirement.

With our guidance, you can put in place one of several strategies to safeguard against this risk. For example, in the years before retirement, you may establish a reserve of low-risk investments designed to provide retirement income in years of market volatility.

Funding the inactive phase. Before you retire, you just don’t know if you’ll be relatively healthy at older ages or require long-term care. What you do know is that long-term care can be costly. One solution is to purchase insurance that would cover in-home care or living in a long-term care home. Another is to set aside funds to cover these costs. If you stay healthy, these funds can become estate assets.

 

¹ Statistics Canada, “A Portrait of Canada’s Growing Population Aged 85 and Older from the 2021 Census,” 2022.