Tranching Retirement

[imoldernu]

As we (DW and I) grow older, (77th year) we're finding that our philosophy is changing, with regard to what we hope for out of our lives. I'd like to share this with you, with the understanding that it's our thinking alone... and not meant to influence the feelings or plans of others.
Part of the thinking come from our own situation, but part also comes from observing and dealing with friends and neighbors in our retirement communities in Illinois, and Florida.
So... one size does not fit all.

We retired at age 53... somewhere in the middle of the planned retirement ages of many who come here.

The idea of Tranching retirement planning comes from looking back to the "early years, phase 1"... for us, age 53 through 75... and now to what we'll call "phase two"... 75 to ? ? ?.

Phase 1... "Doing... the most active years".

Travel, social, physical, play years. The beach... the parties... the social groups... the meetings... the organizing and planning years... not just for our own lives, but being part of the community. A time for volunteering, for leading the way for others.

It was a time for accumulating and buying... boats, vacations, appliances, and those things we always wanted. A time to look around real well and to decide where we wanted to live.

In short, 20+ years of doing things that we wanted to do, and more importantly, having the health and desire to be active.

Phase 2... "Settling in for the long haul".

Not a real big change, like a nursing home or a wheel chair, but definitely less travel, bedtime at 9PM, and no partying 'til 2AM. Having a few brews, has changed to a 4pm martini. The parties require an afternoon nap, and are over for us by 10PM. The 30 mile bike rides are down to 5 or 10 miles, and the all day work projects have become a maximum of an hour or so.

Instead of the three "homes"... Camp at the Lake, Florida Mfg Home Senior Park and the Illinois Senior Retirement Community... phasing down to one permanent year round home.

The second part of this, is physical... no big problems, but the gradual onset of "old age" nuisances... prescription drugs for everything... BP, prostate, IBS, cholesterol, triglycerides, neuropathy, metabolic syndrome, arthritis, and those tiny "out of the norm" blood test levels. None of these serious r debilitating, but there.... "There" being where they weren't 3 to 5 years ago.
...............................................................

So What does this have to do with TRANCHING?

Here's what I see in a nutshell. Phase 1- Twenty +or- years of spending to the activity level, and
Phase 2 - Ten +or- years of a slower , less expensive life.

An arbitrary example of spending... excl. inflation
Phase 1 - $55,000/yr
Phase 2 - $40,000/yr
....................... or any other combination of numbers.

Why do this? In our case, had we planned for what we now see as reduced spending in our later years, we might have spent more in the early years. (doubt it)... More important, If we had thought this way in the beginning, we might have been able to retire earlier.
Thus the reason for the post.
........................
In a previous post, I mentioned our plan for our future living in our Continuing Care Retirement Community. This gives us a fixed cost of living within a budget that we can plan ahead. Lodging, Meals, entertainment, transportation and all utilities ad ancillary costs included in one payment. In fact, when we make the move into an apartment, we calculate that the income from the sale of our house (along with Social Security) should suffice for Phase 2... and continue to provide some estate dollars for our kids.
.......................

So what's different? Probably nothing except as a means for thinking about the later years as an entity apart, and different from the active years. In our case for the next 13 years, we'll need about $180,000 beyond our SS income... This will be covered by the sale of our current house.
In this case... Phase 2 equals the House.
The second benefit from this kind of planning is that you can put a finite date in any financial calculator. ie... the number of years in phase 1.

Whether using this approach or not, I would suggest that though your mileage may vary, understanding the difference between living style and expenses at age 57 through 77
and those at age 77 to 87 ,
will be quite significant..

And, at the VERY LEAST... considering the possibility that the final years of retirement may not be as active as the early years, will help in appreciating what you're doing today.

 

[Lsbcal]

Hi imoldernu, I enjoy your posts. It took me quite some time to decipher your login name. I kept wonder who this guy was who had such a weird login .

You are somewhat over a decade ahead of me and so it's interesting to see one fellow's path through retirement.

Good luck on your current "Tranch"!

 

[eytonxav]

Makes perfect sense to me, thanks for sharing!

 

[NW-Bound]

Uh oh! Looking at your daily activities, looks like I am already in Phase 1-1/2. I was never in Phase 1.

And I am already doing the following that you do in Phase II.

...bedtime at 9PM, and no partying 'til 2AM.

Having a few brews, has changed to a 4pm martini.

The parties require an afternoon nap, and are over for us by 10PM.

The 30 mile bike rides are down to 5 or 10 miles, and the all day work projects have become a maximum of an hour or so.

I usually have a glass of red wine for dinner, and that's all the daily alcohol intake. I have been trying to be more active, but a midday nap is becoming a ritual.

I really think that mentally and physiologically, I am older than my age. No medication required yet, thank goodness.

 

[rodi]

What you describe is kind of the Bernicke model that firecalc has an option... Spending more in early years, then spending drops to a lower level in later years.

OTARs retirement calculator also allows for this - they call it Active, Less Active, and Passive... and allow budgeting for in-home help or nursing home for the Passive years.

I look at my in laws - they spent a lot more in their earlier years - doing 1-2 big trips a year by train. Doing more activities. Now in their late 80's they spend hardly anything.

 

[JoeWras]

Yes, imoldernu, thanks for your insight. It is really good to get some perspective from those "older than us".

Seriously, you've lived -- and are still living -- this thing called a long retirement, so the insights are great.

I'm seeing what you are saying naturally occurred with my parents. The only wildcard is that Dad may have a significant upturn at the end with either assisted living or nursing care. He's worried he won't have anything left to give to me and my siblings. We're worried that he won't live comfortably and start spending some of that money. This is a good disagreement to have compared to some families where it is a money grab. But I digress...

Your post and others have me thinking about my 2018 plan. As mentioned here before, my goal is 2018. But I'll take something earlier if an incentive is given, which I expect. Yet... Some days I wonder if I just shouldn't check out regardless.

I continue to be surprised by the peer pressure around me about early retirement. We don't talk about it much, but when mentioned, people my age are jealous or something and just freak out over the thought that someone in their early 50s would want to ER. But if we keep working, it is for what? Just to accumulate a ton for phase 2, when you rightly point out the needs won't be as great?

 

[azphx1972]

Seriously, you've lived -- and are still living -- this thing called a long retirement, so the insights are great.

+1.

 

[donheff]

I suspect many of us won't spend more in anticipation of spending less later because - what if...? But the idea that spending less in the 80s may enable younger folks to pull the plug a little early may be appealing. Og course, they would have to implicitly accept the tranching concept.

 

[imoldernu]

rodi said:

What you describe is kind of the Bernicke model that firecalc has an option... Spending more in early years, then spending drops to a lower level in later years.

OTARs retirement calculator also allows for this - they call it Active, Less Active, and Passive... and allow budgeting for in-home help or nursing home for the Passive years.

Yes... and when it come to choice of calculators,
Retirement calculators and spending - Bogleheads

Note that FireCalc offers the most options for planning.

I wish they had been around in 1989, when we needed them...

 

[pb4uski]

....I continue to be surprised by the peer pressure around me about early retirement. We don't talk about it much, but when mentioned, people my age are jealous or something and just freak out over the thought that someone in their early 50s would want to ER. But if we keep working, it is for what? Just to accumulate a ton for phase 2, when you rightly point out the needs won't be as great?

I'll never forget we were at a public dinner event with about 80 people when SIL first learned I was retiring and she exclaimed rather loudly "You're too young to retire!" - embarrassing.

But what you say is exactly why I retired - I have enough for me and DW and to continue working was just enriching the kids. There have been too many classmates who have died prematurely and you never know - time to have fun!

 

[MBAustin]

...But what you say is exactly why I retired - I have enough for me and DW and to continue working was just enriching the kids. There have been too many classmates who have died prematurely and you never know - time to have fun!

+1. And I think the OP has hit the nail on the head - for those of us who ER in our late 40s/early 50s, the financial planning for the "spend" phase is quite different than for those who wait until 65 or later

 

[NW-Bound]

In this forum, many people plan on spending beaucoup money straight into the age of 80 or even 90.

Whoa! I always subscribe to Bernicke's spending model, because I have observed plenty of examples of how older relatives live. If I keep on spending that much into the later years, then that would mean a lot of medical bills. I'd rather take a one-way flight to Holland, where they would help end my misery, and fly me back in a little jar.

So, why am I planning to spend 4%, while FIRECalc says I can spend a lot more, if I add SS and Bernicke's model to the calculations?

I must overcome my scrooginess, and turn up the faucet. However, I have no desire for anything more other than travel, and cannot do as much as I can or want to because of my wife's obligation.

I guess for now, I will just entertain myself with trading SOXL and hopefully taking joy in seeing my Quicken's bottom line inching up.

 

[SJ1_]

+1.

++1

Thanks once again for sharing your knowledge.
Your posts are filled with great info. and wisdom.

 

[ERD50]

I suspect many of us won't spend more in anticipation of spending less later because - what if...?

Exactly. I'm sure that imoldernu's report is typical, maybe even represents a large majority, but many of us aren't comfortable enough with that. Heck, the 'typical' retiree could use a 5.89% WR, as that provides a ~51% success rate, per FIRECALC. Some would fail in just 12 years, but that isn't typical.

With so many unknowns, I prefer to not to plan for a decreasing spend level. Just another little buffer.

-ERD50

 

[Spanky]

Thanks for sharing. We couldn't wait to start Phase 1.

 

[traineeinvestor]

Thank you for sharing your experience.

It's very similar to what my parents have gone/are going through. In particular, they are getting in quite a bit of travel before it becomes too hard for them and are thinking about when they will need to move from their duplex apartment to a simplex.

For my part, I am sticking with my constant (inflation adjusted) spending model because:

1. I don't know how long I will be physically and mentally capable of some activities and do not want to put myself in a position where I have to cut some activties in order to keep food on the table

2. who knows what curve balls life will throw at me in 20 or 30 or 40 years time? I certainly don't. What I do know is that hitting a financial speed bump late in life when I am already forced to cut my spending is the sort of thing that would keep me awake at night

3. I don't feel any need to increase spending from our budget in the early years of retirement (certainly not in the first few when I am adjusting to not having a pay cheque)

4. if I can't spend money on activities due to physical limitations, I can always find other things to spend it on (including charities), failing which I'm happy to leave it to my [-]children[/-] cat. There won't be too many regrets at leaving some money on the table

 

[smurray5991]

Interesting post and concept, imoldernu. I wonder if you anticipate a Phase 3 in this "Tranching" model, i.e., maybe starting at 85-90 until death, and where there would likely be more serious health issues that start to set in requiring greater health care expenditures. Thus a possible need for increase in spending compared with Phase 2? It sounds like your investment in a CCRC may be enough to mitigate that because graduated care is 'guaranteed' and at a known cost. If people weren't in such a community or didn't have LTC insurance, those end of life years could potentially pull up the expense curve again....
I've not decided for myself how to plan for that eventuality, but am leaning more towards a continuing care community model such as you have chosen. But for others, maybe make sure to factor in a possible Phase 3?

 

[obgyn65]

I also use "tranching" in my plans. Clearly, I will be more active at 55 than 95 (if I ever reach that age), therefore I may need less cash per year then.

I also use "tranching" for my annuities (i.e. buying deferred ones at a young age, and buying SPIAs at much older age).

 

[chris2008]

Thanks for sharing.
While we want to believe that we will always be as active and independent as we are today for most of us this is wishful thinking.

Anyhow, I am somewhat skeptical here:
"we now see as reduced spending in our later years, we might have spent more in the early years. (doubt it)... More important, If we had thought this way in the beginning, we might have been able to retire earlier".
I'd rather take the reduced spending of later years as additional safety net against inflation of healthcare and support cost as well as cost of retirement communities.

 

[JoeWras]

Interesting post and concept, imoldernu. I wonder if you anticipate a Phase 3 in this "Tranching" model, i.e., maybe starting at 85-90 until death, and where there would likely be more serious health issues that start to set in requiring greater health care expenditures. Thus a possible need for increase in spending compared with Phase 2? It sounds like your investment in a CCRC may be enough to mitigate that because graduated care is 'guaranteed' and at a known cost. If people weren't in such a community or didn't have LTC insurance, those end of life years could potentially pull up the expense curve again....
I've not decided for myself how to plan for that eventuality, but am leaning more towards a continuing care community model such as you have chosen. But for others, maybe make sure to factor in a possible Phase 3?

My dad is currently entering phase 3 at near 90, with increasing costs. I'm seeing it up close and personal now. So, his expenses are now going up with self pay and fee for service contract as he moves to senior living.

In our cases, CCRC may or may not mitigate the late cost upswing depending on the type of contract and expense model we enter. imoldernu has talked about CCRC in other threads and had some pointers. It is worth everyone understanding them, even if you think you or your family may never live in one.

In the wash, perhaps just keeping a constant spending model at phase I would approximately take care of the possibility of phase III.

Interestingly, when DW and I were looking at some CCRCs for Dad, they knew he was really beyond their entry age target. Even though we are too young to be eligible for CCRCs, it was clear to me that *we* were already being sold to. I admit, I never considered the option. However, with no close heirs, DW and I very well may consider this option in about 20 years or so.

 

[MichaelB]

........................
In a previous post, I mentioned our plan for our future living in our Continuing Care Retirement Community. This gives us a fixed cost of living within a budget that we can plan ahead. Lodging, Meals, entertainment, transportation and all utilities ad ancillary costs included in one payment. In fact, when we make the move into an apartment, we calculate that the income from the sale of our house (along with Social Security) should suffice for Phase 2... and continue to provide some estate dollars for our kids.
.......................

So what's different? Probably nothing except as a means for thinking about the later years as an entity apart, and different from the active years. In our case for the next 13 years, we'll need about $180,000 beyond our SS income... This will be covered by the sale of our current house.
In this case... Phase 2 equals the House.
The second benefit from this kind of planning is that you can put a finite date in any financial calculator. ie... the number of years in phase 1.

older, how did you prepare your cost estimate for CCRC based living? Would you mind sharing some of your numbers with us?

 

[Independent]

I had a co-worker who said that retirement comes in three stages:

Active
Passive
Dependent

I think that's what you're saying here. Expenses are U-shaped. But the Dependent phase is the least certain.

One possible planning result goes like this:

We should have an lump sum for "extra" spending in the Active years, and some plan for the potential spending in the Dependent years.

Set aside that $50k or $500k (whatever fits our finances/lifestyle) to do the fun stuff in the Active years.

Buy LTC insurance, or put aside a lump sum that we hope we never spend, to cover the potential expenses in the Dependent years.

The rest of our assets provide a level, base income for all years. That income should be about equal to our Passive years' spending.

 

[imoldernu]

older, how did you prepare your cost estimate for CCRC based living? Would you mind sharing some of your numbers with us?

Yeah... sorry... it was on another thread, but here's the gist":

...let me back off here, and give some numbers for our area... likely in the lower cost bracket. The facilities are all relatively new... begun in 2000. The price for a 2BR 1BA apartment is (no up front or contract fee) $2000/month plus $500/mo for second person, which includes:
Apt. Kitchen... refrigerator, stove, handicap equipped, elevator, 2 meals/day in formal dining room. Transportation to doctor, shopping, entertainment (twice a week) activity rooms (cards, bingo, library, hair salon, presentations/entertainment). Available garage, Free TV and Internet.

Now, here's my thinking about using this arrangement to budget for the later years... In our case, age 80, some 3 years from now. The $2500/month... comes to $30,000/yr. This amount essentially covers all living expenses except for personal care, clothing and supplemental food... (perhaps another $2,000/yr.) and about $8000 in non covered medical expenses... total $40,000/yr.
Since our Social Security is $25,000/yr... it means $15,000 per year from our savings. If we live to age 90... $150,000 from assets.

The sale of our house would much more than cover that... Leaving most of our current assets for an estate.

Here's the thread, with more on CCRC's

http://www.early-retirement.org/forums/f27/sharing-23-years-of-frugal-retirement-62251-3.html post #85


...and yes, it doesn't take into consideration inflation or other influences. It also doesn't consider Nursing Home costs... (in our case a hedge, with some LTC insurance)...

I guess the main point comes down to finding a comfortable place to live in the later years... a simpler life... with a plan, right or wrong, a starting place.

 

[RobLJ]

It's interesting you posted this, because I just read Pfau's article on adjusting spending on an annual basis to maximize the "utility rate" (allowing to maximize withdrawals). I'm moving more towards this approach, in part to allow higher withdrawal and more active early retirement, until we reach Social Security, where we would cut back the withdrawal rate.
Pfau's article is here: Retirement Researcher Blog: “Optimal Withdrawal Strategy for Retirement-Income Portfolios”

Many of you may be interested, and I've seen that many of you already are doing some kind of annual adjustment.



So What does this have to do with TRANCHING?

Here's what I see in a nutshell. Phase 1- Twenty +or- years of spending to the activity level, and
Phase 2 - Ten +or- years of a slower , less expensive life.

An arbitrary example of spending... excl. inflation
Phase 1 - $55,000/yr
Phase 2 - $40,000/yr
....................... or any other combination of numbers.

Why do this? In our case, had we planned for what we now see as reduced spending in our later years, we might have spent more in the early years. (doubt it)... More important, If we had thought this way in the beginning, we might have been able to retire earlier.
Thus the reason for the post.
........................
In a previous post, I mentioned our plan for our future living in our Continuing Care Retirement Community. This gives us a fixed cost of living within a budget that we can plan ahead. Lodging, Meals, entertainment, transportation and all utilities ad ancillary costs included in one payment. In fact, when we make the move into an apartment, we calculate that the income from the sale of our house (along with Social Security) should suffice for Phase 2... and continue to provide some estate dollars for our kids.
.......................

So what's different? Probably nothing except as a means for thinking about the later years as an entity apart, and different from the active years. In our case for the next 13 years, we'll need about $180,000 beyond our SS income... This will be covered by the sale of our current house.
In this case... Phase 2 equals the House.
The second benefit from this kind of planning is that you can put a finite date in any financial calculator. ie... the number of years in phase 1.

Whether using this approach or not, I would suggest that though your mileage may vary, understanding the difference between living style and expenses at age 57 through 77
and those at age 77 to 87 ,
will be quite significant..

And, at the VERY LEAST... considering the possibility that the final years of retirement may not be as active as the early years, will help in appreciating what you're doing today. [/QUOTE]

 

[Cut-Throat]

Put another way.

1.) The Go Go 60s
2.) The Go Slow 70s
3.) The No Go 80s
4.) The No Show 90s.