Many retirees are finding that their golden years aren't so golden after all. The face of retirement is changing, driven by the disappearance of pensions, a fragile Social Security system, inadequate savings — and lives that last longer than ever.
That final factor may be the most significant of all. Medical advances keep lengthening our lives. Someone who reaches age 65 can expect, on average, to live another 19 years, according to the Centers for Disease Control. Some people, of course, will live even longer than that.
That's great news in general, but it can play havoc with retirement planning, as many baby boomers are finding out. When you live longer, your money needs to last longer. But a big problem is many people still hold fast to a retirement model based on a much shorter lifespan. They don't consider that their retirement could last three decades or more, and so they don't plan how to pay for that.
There are a few things people should take into account as they prepare for what could be a decades-long retirement.
Start with the effects of inflation. The rising cost of living can be an insidious enemy for retirees. For example, a 3% inflation rate over 24 years could cut your purchasing power in half. That means if you retired at 60, by the time you reached 84 you would need twice the dollars to maintain the same standard of living.
Over time, inflation can destroy wealth. As they plan for retirement, it's critical that people factor in the effect inflation could have on their savings.
Our longevity is at the root of the problem with Social Security. When Social Security began in the 1930s, most people didn't live long after their working days ended. There were also plenty of young workers who could be taxed to pay for the retirees receiving benefits.
Both those factors have changed. One result is the government has limited the year-to-year increase in benefits. That means Social Security won't replace as much of your pre-retirement income as it once did.
Some people may want to delay collecting benefits until they are 70, which increases the monthly amount. Regardless, everyone will want to make Social Security decisions based on how it affects other parts of their retirement income plan.
There was a time when many Americans had generous pensions that lasted as long as their lives did. Fewer and fewer retirees can count on such pensions today. Instead, many employers shifted to a 401(k) plan. That meant employees became investors who needed to accumulate enough money to last a lifetime — and many weren't good at it.
Some failed to diversify, keeping much of their money in company stock. Despite that, employees should participate in a 401(k) if they have the opportunity, especially if the employer makes a matching contribution. But that might not be enough. A good rule of thumb is that 15% to 20% of your gross salary should be stashed away for retirement.
Longevity impacts a wide range of retirement decisions. The key thing to remember is that you can't expect the strategies of two or three decades ago to work today. It's a new game.
Mark Fried, president of TFG Wealth Management, LLC (tfgwealth.com), is the author of “Road Rules for Retirement.” He is an Investment Advisor Representative, a Chartered Retirement Planning Counselor and an insurance professional. Fried has been a contributor to several digital publications, including Forbes, Morningstar and The Wall Street Journal. He has been a guest on Fox Business and NBC, and co-hosted the PBS special “How to Select a Financial Advisor.”
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