by Bruce Fenton

Flipping the switch from work to retirement mode is not quite like flipping a switch to light a room. It is not a black and white transition. And neither is handling your investment accounts during the change.

Ask anyone recently retired about the adjustment process … according to a poll done by American Demographics®, 41% of retired workers said they were having a difficult time adjusting to retirement … compared to 12% of the recently married having a difficult time adjusting to marriage!

I suspect that many of those disenchanted follow a similar pattern … hit the local coffee shop in the morning, hang out with the other retirees, drink too much coffee, listen to the same stories over and over … and, finally, one morning saying to themselves, “Is this all there is to life?”

Our way of thinking about retirement needs an overhaul. We are geared to think of retirement in terms of the way it was defined 100 years ago: Work to age 65 (never mind that life expectancies were 46). If lucky enough to live to retire, we wouldn’t have to worry about a long line at the coffee shop. We persist in asking our retirees to make what author Mitch Anthony (The New Retirementality) calls “age-justments” or simply turn off who they are and the activities that drive their pulse … simply because they reached age 62.

Retirement is really a three-phase process.

The first phase occurs between 50 and 61 when the kids leave and our focus becomes wealth accumulation. At this time we concentrate on building the nest egg, paying off education bills, and thinking about where and how we wish to live the last third of our life. Our investment focus is growth-oriented and the larger portion of our portfolio will be in equities.

The next phase extends from age 62 to 75. Real change begins, as we leave the work life behind, but not necessarily abandoned. At this point we begin to trade leisure time for human capital … the latter defined as the present value of future earnings.

This is probably the most misunderstood phase of retirement … because to retire does not simply mean quitting work. It is more about the choices we make for the use of our time.

A study done by the Gallup® organization found that 60% of retirees want to become entrepreneurs or to seek a new job to fulfill their dreams, 10% are seeking a new work-life balance, 15% hope to enjoy a traditional retirement and the remaining 15% do not want to retire. Clearly this phase is not about quitting work … more like having the freedom to do what we want, without having the economics of the endeavor as the chief motivating factor.

From an investment perspective, those who continue to work and earn, at whatever they choose to do, are continuing to build human capital and can afford to take more risk with their investments. Their portfolios should reflect a bias toward equity or growth investments, consistent with their willingness to accept investment risk. As their production of human capital tapers off, and the need to depend upon investments for support or other retirement goals increases, this more risky strategy should begin to give way to less risky investments.

The third and final phase of retirement begins about age 75. Now health concerns manifest themselves and we cut down on expensive travel and recreation that we pursued with such abandon 10 years before. The option of generating human capital has all but disappeared, and with it so should the risk in our portfolio. This does not mean that we throw out all stocks in favor of bonds … rather, that we begin to take a more cautious approach to investing with preservation of capital key.

Man’s life, as with all things in nature, has seasons. His investment strategy should reflect seasons as well.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.