Retirement isn’t what it was in your grandparents’ or even your parents’ generations. Longer life spans, the decline of traditional pensions, and the rise of 401(k)s and gig work are among the factors affecting retirement.
“As exciting as the advances in health care and the prospect of living longer are, preretirees also face a higher risk of outliving their savings compared to previous generations,” said Michelle Bennett, a certified financial planner and executive vice president of Newport Capital Group in Red Bank, New Jersey, in an email.
Here are several aspects that preretirees should consider before leaving the workforce.
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Retirees are Living Longer
Forget the idea of planning to live only until age 70. A 65-year-old woman in the U.S. can expect to live another 19.7 years on average, according to research site Statista. Meanwhile, a 65-year-old man should expect to live another 17 years.
That’s quite a contrast to life expectancies in 1970, when a 65-year-old man could expect to live another 13.1 years and a 65-year-old woman another 17.1 years.
“The importance of planning for more time during retirement is imperative,” said Bennett. “It is essential to consider a range of costs to ensure that your savings will cover your lifestyle in your retirement years.”
Because of rising health care costs, taxes, inflation and lifestyle changes, Bennett recommends beginning retirement planning as early as possible.
Effects of Inflation
Retirement savers often neglect to factor inflation into their future purchasing power.
“The impacts of inflation not only have short term, but also long-term implications. Just because the inflation rate of a given basket of goods is coming down does not always mean that a reduction in price is seen right away in the stores,” said Kevin Chancellor, CEO and financial advisor at Black Lab Financial Services in Melbourne, Florida, in an email.
“The stress that inflation is putting on people’s pocketbooks is being reflected in the amounts of extra withdrawals needed to supplement income, which may reduce the amount of income they may be able to take in the future,” Chancellor said.
He noted that investors may be taking more risk in their portfolios to generate more growth for future living expenses. “During retirement, the game is to not outlive your retirement savings and inflation can definitely put more risk on the probability of not running out of money,” he said.
[Related:How Retirees Can Cope with Inflation]
Retirement Could Last for Several Decades
Because Americans are living longer, retirement could last for 35 years or more.
“As retirees live longer, one aspect of investment strategy that becomes significantly more important is managing portfolio volatility,” said Christopher Stevenson, a chartered financial analyst and founder of Forrest Financial Partners in Avon, Connecticut, in an email.
Having the right balance of returns versus volatility is crucial to ensure that a retiree’s assets last for decades, Stevenson added.
He notes that one of the biggest challenges for retirees drawing income from their portfolios is sequence risk, the danger of significant portfolio losses early in retirement.
Achieving the right mix of assets by balancing equities for growth and bonds for stability is key to managing volatility, he said.
“Portfolio diversification is equally important,” Stevenson added. “By spreading investments across various asset classes, retirees can reduce the overall correlation of the portfolio, meaning not all assets will respond the same way to market conditions.”
This strategy helps mitigate the impact of volatility and may offer better protection during market downturns.
Will Younger Boomers and Gen Xers Have To Work Longer?
While some people stay in the workforce because they’re healthy and enjoy what they do, others must continue working even though they’re ready to quit the daily grind.
Many people born after 1960, for whom the full Social Security retirement age is 67, also don’t have enough savings to retire. For that group, working longer may be a reality, even if it means part-time work to supplement other income.
“More than half the boomer generation has less than $250,000 in savings and will have to rely primarily on an already strained Social Security system,” Chancellor said.
The picture looks worse for Gen X, born between 1965 and 1980, who may not be saving adequately or at all.
Not only is inflation impacting the ability of Gen Xers to retire, but many have adult children who need financial help.
“Gen X also carries more debt than the boomer generation, and debt obligations are one of the biggest obstacles of a successful retirement,” Chancellor said.
Shift From Pensions to 401(k)s
Anyone who’s been a full-time employee knows that the defined-benefit pension plan, once a critical component of American retirement, is essentially extinct in the private sector.
“Corporations today have largely switched from a pension-driven retirement system to a 401(k),” said JoePat Roop, president of Belmont Capital Advisors in Belmont, North Carolina, in an email. “That might be good for a corporation, but in some cases it is a disaster for the plan participant or retiree because they have 100% of the responsibility to manage their funds and make them last for as long as they live.”
One solution, he said, is purchasing an annuity that guarantees lifetime income.
“It is important to understand that we would not recommend annuities for all of someone’s retirement portfolio, but having a portion that offers principal protection and lifetime income with raises can be a very meaningful part of that security,” Roop said.
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Becoming a Millionaire Is No Longer Enough
For generations, Americans dreamed of becoming millionaires by the time they retired. However, inflation and rising costs of living have shifted the benchmark.
Today, $1 million may no longer guarantee a comfortable retirement, as health care expenses and longer life expectancies are taking a bigger bite from savings.
“It sounds odd to hear someone say, ‘A million dollars sure does not last as long as it used to,’ But it is true: $1 million may not be enough to retire on comfortably,” said Josh Anderson, CEO of Eagle Legacy and Financial in Eagle, Idaho, in an email.
Longevity, health care costs and market volatility pose significant risks to retirees, Anderson said. In addition, a major market correction in the early years of retirement can cause significant damage to a portfolio once valued at $1 million.
Does the 4% Rule Still Apply?
The 4% retirement withdrawal rule, developed in 1994 by financial advisor William Bensen, suggests that retirees can withdraw 4% of their savings annually, adjusted for inflation. According to the rule of thumb, that withdrawal rate should maintain a comfortable lifestyle for 30 years in retirement.
The rule, Chancellor said, was developed in an era with different market conditions, monetary policies and different retirement planning tools than today.
While the 4% rule may still be a good guide, preretirees may need to focus more on growth assets in their working years.
“However, when a person is close to retirement or retired, it is just the opposite. There is a very real difference in the strategy to accumulate assets versus the strategy to distribute those assets over time,” Chancellor said.
For example, someone who has saved $1 million can reliably withdraw 4%, or an inflation-adjusted $40,000 per year, using a balanced portfolio of 60% stocks to 40% bonds. While $40,000 per year isn’t enough to sustain a comfortable lifestyle in the U.S. today, retirees can also rely on Social Security.
Chancellor noted that during the span of extremely low interest rates between roughly 2010 and 2021, bond yields were not producing adequate income. That meant many retirees would have needed annuities for their fixed-income needs or place more risk on the equity side of their portfolios.
“I personally only use the 4% withdrawal rule as a conversation starter,” he said.
Rising Taxes
With the U.S. national debt piling up, and states and municipalities facing higher costs, it’s a safe bet that taxes will increase.
“When it comes to taxes, we always ask if people think taxes are going to increase, and 99% of the time most of them do believe taxes are going to be higher,” said Roop. He added that it’s crucial that retirees have a tax strategy in addition to their investment strategy.
For example, one strategy may be a Roth individual retirement account conversion.
“Many times it would be advisable for folks to transition some of their taxable IRAs into a Roth IRA,” Roop said. “This will have the ability to help them lower their taxable income and use this as a hedge against the potential of rising taxes in the future.
Higher Health Care Costs
According to an August 2024 report from Peterson-KFF Health System Tracker, the price of medical care, including insurance, drugs and medical equipment has increased by 121.3% since 2000. In contrast, prices for all consumer goods and services increased by 86.1% during that time.
“The astronomical costs of health care keep many individuals from retiring when they would like,” Chancellor said. “Even super savers, who have really put in the work saving for retirement, still may need to wait until 65 for Medicare to retire comfortably.”
Health care is a major expense during retirement, he added, even with Medicare and Medicare supplements helping to cover costs through deductibles and copays. However, Medicare doesn’t necessarily cover all health care costs.
“A person needs to consider their family health history and whether additional planning needs to be done to protect against unforeseen health issues as well as how a potential long-term care event is going to be covered,” Chancellor said.
He pointed out that many retirees only insure for health care but not for the costs of an assisted living facility or skilled nursing care, which Medicare will only cover in specific situations.
“Having to cover that out of pocket can decimate savings and many times force people to turn to Medicaid for a long-term care event,” he said.
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9 Ways Retirement Has Changed originally appeared on usnews.com
Update 10/02/24: This story was published at an earlier date and has been updated with new information.
