Different issues tend to get more attention during each decade of retirement, and advisors need to guide clients through those phases. For example, when you’re at the start of what may be a three or four decade retirement, it’s crucial to stay engaged. As Somers says, “The brain needs novelty and a challenge.” That’s why many advisors recommend that retired clients consider part-time work for a time to ease away from working full time and get a sense of the transition to no work at all.

When I suggest to my own clients that they first downshift to part-time work, many of them are pleasantly surprised to hear that their employers still want to tap their knowledge, even if only for a few years.

Glide Paths And Smiles
Once your client has retired, there are two investing concepts he or she needs to become acquainted with: the equity glide path and the retirement spending “smile.”

Conventional wisdom suggests that retirees should steadily sell off their growth-oriented investments and make their portfolios more conservative as they age. But industry thought leader Michael Kitces believes such an approach may be ill-advised.

In 2013, he and retirement planning specialist Wade Pfau co-wrote a research paper entitled “Reducing Retirement Risk with a Rising Equity Glide-Path.” They concluded that “a declining equity exposure over time will lead the retiree to have the least in stocks if/when the good returns finally show up in the second half of retirement.” They added, “with a rising equity glide path, the retiree is less exposed to losses when most vulnerable in early retirement, and the equity exposure is greater by the time subsequent good returns finally show up.”

Remember that the paper was written when extended longevity trends weren’t as evident as they are now, and the authors’ key takeaway may be even more relevant today than it was in 2013 given the current state of equity markets. Unless the S&P 500 suffers a major drop in the final months of 2021, the index is on pace to post its 10th double-digit gain in the past 12 years. If that’s a hint stocks are due for a breather and might post a sizable drop in the next few years, it means clients may have an even greater need to maintain meaningful equity exposure in coming years to benefit from a market rebound that may come later in their extended retirement.

Though it’s an advisor’s job to be thoughtful about the market’s performance, the client’s withdrawal rate and the tax efficiency of those withdrawals, there’s another aspect of client behavior they need to consider. Clients tend to be overly cautious about spending in the early years of retirement, and that might not be the right idea.

That’s where the “retirement spending smile” comes in. It assumes that as we age, we tend to slow down, get more sedentary and spend less. Which suggests that new retirees should actually be encouraged to spend more on travel, dining out and other types of discretionary items.

David Blanchett, the head of retirement research at Morningstar, wrote in the May 2014 Journal of Financial Planning that a retiree’s spending tends to fall in real terms at roughly 1% per year for the first 20 to 25 years after somebody leaves work.

However, because of the late-in-life surge in chronic care spending, retirees’ expenses start to rise in their final years. Even if clients have long-term-care insurance policies, these may not cover all of their expenses, which means they must set aside funds for extra costs.

And those costs keep on rising. In 2014, a private room in a nursing home cost around $65,000 per year, according to Genworth Financial. By 2020, that figure had surged 62% to around $105,000.

As annual costs keep rising, so do the number of years people may spend in a facility as they live longer. And there’s also the prospect of dementia, whose incidence rates increase with age.

To be sure, an early retirement (either planned or unplanned) in tandem with increasing expected life spans can render a long-term financial plan less viable. Clients may not want to hear about the longer-term financial risks associated with a very lengthy retirement. Still, an advisor is not in a position to sugarcoat matters when the numbers don’t fully add up. When that happens, your insights about extended work and longevity could be the difference between a merely decent financial plan and a robust one.      

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