Co-produced with Philip Mause

One of the earliest efforts at both encouraging retirement and providing for it was initiated by Caesar Augustus when he guaranteed pensions for Roman Legion soldiers at 3000 denarii – partly to reduce strife in the empire and partly to increase his popularity. Some historical analysts believe that – over the years – the burden of this obligation, which was never properly funded, played a big role in the decline and ultimate fall of the Roman Empire.

Much later in time, Otto Von Bismarck instituted pensions in Germany on a pay as you go basis in 1889. Workers were eligible for the pensions at age 70 (later reduced to 65). At the time, the life expectancy was 44 so that a relatively small number of workers collected pensions for a relatively short period of time.

When Social Security “insurance” was instituted in the United States in the mid-1930s for workers at age 65, the life expectancy had increased to 61 so that many workers paid into the plan but never collected. In a real sense it was “insurance” in that it was insuring workers against the somewhat unlikely prospect that they would live well beyond age 65. By 1946, life expectancy reached 65 and the rest is history. It reached 70 in 1970, 75 in 1990 and sits at around 79 today. The impact of this increase in life expectancy is one of the factors neglected in political and economic analysis and it has contributed to a number of modern economic and political dilemmas which have sometimes been allowed to grow into crises. There’s no reason to believe that life expectancy will not continue to increase over time.

In this context, “retirement” has begun to become a much more significant portion of a typical lifetime. For a person who moves through college slowly, takes a couple of graduate courses, starts work at 25, and then retires a bit early at 60, it’s entirely possible that he or she will spend more years in retirement than working. For many, retirement is no longer a couple of years sitting in front of a television screen waiting impatiently for the Grim Reaper. Instead, it lasts for decades and includes a wide variety of experiences.

It becomes important to figure out exactly what one wants (and what one doesn’t want) out of retirement. L. Rust Hills, an Esquire fiction editor, wrote an excellent book – How to Retire at 41 – which is out of print but worth tracking down. It outlines – in humorous prose – some of the dilemmas of this relatively new phase of life that we must all get used to.

A good way to organize one’s thinking about this issue is to break up retirement into four phases. These phases are very different from one another. It must be noted that some retirees will retire directly into phases 3 or 4 depending upon circumstances.

Phase 1: Healthy and Adventurous

In this phase, a retiree is still healthy and is interested in pursuing adventurous (and sometimes expensive) hobbies and activities. This is the phase in which one may take an African safari, still own and operate a boat, ski, attend sports and other entertainment events, eat out often, and do extensive travel. These activities are expensive but there’s also good news. This is a phase of retirement in which a retiree – because he or she is still healthy and hearty – is still capable of work. This work may be a gradual phase out of the work performed during primary work years or it may be a new “encore career” that a retiree identifies and pursues. A good way to think about this phase is to think of all the things one wanted to do and to try to do them now. It’s the proverbial “bucket list” phase of retirement. Financial management requires attention to the potential for income producing activity which is consistent with being able to enjoy these activities.

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Phase 2: Without Work

In this phase – which some retirees will never experience and some may retire directly into – the retiree still wants to engage in expensive activities but no longer wants to (or has to) work. A retiree with sufficient financial resources may be able to engage in adventure travel, yachting, etc., without having to work. Before dashing down this road, however, a retiree should take careful stock of his or her financial situation to be sure that they are not the victims of euphoria and are being realistic.

Phase 3: Simplifying Life

This stage of retirement is what we often see as a stereotype in movies and television shows. Retirees living in a small apartment or condo, opening the mail every day, doing the crossword, taking short walks, watching television, and having very limited travel. If a retiree in this phase owns a large home, he’s likely to sell it, pocket the gain, and move into a smaller and easier to manage residence. A retiree in this phase has very little appetite for a 15-hour flight to India. Travel may consist of short trips to visit relatives and perhaps a week in London or Paris. If the retiree owns a boat, it will likely be sold. This phase of retirement almost never involves much income-producing work. But the silver lining is that living costs are low and that many retirees will have obtained additional resources through the sale of a residence which has appreciated in value.

Phase 4: Assisted Living

This is a phase of retirement in which expenses increase due to the need for assistance of one kind or another. It’s a phase which can be very challenging and complex at the very time when the retiree doesn’t have the mental or physical resources to deal with this complexity. Unfortunately, some retirees can retire directly into phase 4 (for example, if they have a serious stroke at age 62 or have early onset dementia). The number of retirees needing assisted living will grow enormously over the next few decades as baby boomers age and longevity increases. Our society has to begin coming up with more creative approaches to this problem. Individuals must be creative as well. For example, friends of ours were able to have a family move into their large home to offer assistance in exchange for free rent, free board, the qualification of their children in an excellent school district, and compensation which was generous but still far below the cost of 24 hour a day nursing service.

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Financial Implications

There’s no “one size fits all” concerning these four phases or their financial implications. Some retirees will enter phase 1 and then die quietly in the night before entering any other phase. Others will unfortunately enter phase 4 without passing through the other phases. Some generalizations can be made about investment strategy but a great deal depends upon individual circumstances and preferences. Among these preferences are –

  1. Willingness to work at least part time
  2. Potential for inheritance during retirement
  3. Desire to bequeath assets to children or other heirs
  4. Attachment to a certain location or residence

Bearing these in mind, in the early phases of retirement, a retiree should consider focusing on total return and recognize that, with many years ahead, he should allocate a substantial portion of his portfolio to equities. If work can be variable, the retiree has somewhat of a hedge against portfolio erosion in that he can elect to do more work to offset portfolio losses. Knowing that this is available should allow a retiree to shoulder a bit more risk. For this reason, those contemplating retirement (unless they are affluent enough to retire directly into phase 2) should try to identify income-producing activities that they may be able to pursue in retirement and even begin to ramp up to the point of being able to engage in these activities prior to retirement.

In phase 3, a retiree should be able to limit living costs and also reap the appreciation on his primary residence by moving into a smaller and easier to manage abode. In this phase it’s entirely possible and it may even be an objective to spend less than the yield on one’s portfolio in order to build it up. In this phase, there should be a heavy emphasis on yield oriented investments – including dividend stocks – with fairly low turnover in the portfolio. This phase can be dangerous for investors because the reduction in other activity could lead an investor to become over anxious and even hyperactive with his portfolio. Even though a retiree in this phase is not going to try to climb Mt. Everest, he should try to identify interesting activities, try to continue regular exercise, and try to find mentally stimulating projects. A failure to do this can lead to a kind of portfolio obsession and depression at the prospect of even short term paper losses.

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Phase 4 is in some ways the hardest challenge. Depending upon how much assistance is necessary, upon whether a spouse can be helpful, upon whether adult children can pitch in, and upon how long phase 4 lasts – this can be a very, very expensive phase. One solution is long-term care insurance of one kind or another, but purchasers should examine policy terms very carefully. Another possible solution is a deferred annuity starting at a relatively senior age (say, 85) which would provide for “insurance against living too long” and not be subject to disputes about whether particular kinds of long term care are necessary or appropriate. Governmental support also is a consideration and various consultants are available to advise on asset preservation consistent with eligibility for such support.

Don’t Get Depressed

Retirement has become more challenging and complex – sometimes, this can seem to be overwhelming and frightening. But it’s also true that retirement (now a major phase of one’s life) has become much more interesting. There are opportunities for constructive and fulfilling “encore careers.” There are many, many activities that one can enjoy that do not require the expenditure of large amounts of money but are can be a great deal of fun. The time you will or do have available gives you a luxury that few in human history have ever had – visits to national parks, time spent with grandchildren, looking up old friends, pitching in at a community center or church – these are the things that can truly be the richest experiences of your retirement. If you don’t obsess over money and you look for ways to make yourself useful to others and to your community, you will be among the richest people on the planet.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Treading Softly, Beyond Saving, PendragonY, Preferred Stock Trader, and Philip Mause all are supporting contributors for High Dividend Opportunities.