Planning for the New Normal Retirement
It’s Not Your Grandfather’s Retirement Anymore
The need for retirement planning didn’t really exist until well into the 1970s. Up to that point, people worked until age 65 and then spent a few years in leisure through their life expectancy, which was about 69. Many retirees of that era were able to coast into retirement with the support of a pension plan. Over the next few decades, as life expectancy -- and the number of years in retirement -- continued to expand, financial planners came up with simple rules of thumb for determining how much a person would need at retirement to maintain their lifestyle.
That’s where the 70% rule came from. People were told that they would only need 70-80% of their pre-retirement income to preserve their lifestyle throughout their golden years. While that may have worked for retirees back in the 1970s and 1980s, it could spell disaster for today’s retirees.
Today’s retirees face a whole new set of financial challenges. Many are carrying mortgages and other debt into retirement. Health costs have increased nearly tenfold. Because we are living longer, health care costs will consume an increasing piece of the retirement nest egg. About 50% of today’s retirees find themselves sandwiched between their own kids, who may still be in college or struggling to break free of the nest, and their aging parents, who may require assistance in their daily lives. Some retirees are actually finding that their retirement income needs may be as much as 110 percent of their pre-retirement needs. So much for the old rules-of-thumb.
Prioritize the Risks to Manage
Today’s retirement savers may be wary of the uncertainties in the markets and the economy, but there are risks leading up to through retirement that are certainties. The two biggest risks are longevity risk and inflation risk. Unlike market risk, which can be avoided by taking your money out of the market, longevity and inflation are two risks that are inescapable. Most people are either unaware of these risks or have not fully grasped their significance in their planning.
For today’s retirees, longevity risk is a new phenomenon. Although people may understand that they can expect to live longer, few realize that longevity constantly expands as they age; in other words, the longer you live, the higher your life expectancy. The risk of longevity is further compounded by the risk of inflation. Even at an average inflation rate of 3%, the cost of living will double in 24 years, which could put many retirees’ lifestyles in jeopardy.
Retirement as a New Life Cycle
A new trend is emerging -- retirees viewing their golden years not as retirement, but as a new phase of life in which earnings from some form of employment or business ownership may be a necessity ... or a choice. Many people can’t imagine themselves coasting through 30 years of life without being able to apply their skills or knowledge in a meaningful way. For many, it is an opportunity to regenerate themselves through new opportunities and gaining new knowledge. Instead of an ending phase of life, retirement is increasingly being looked upon as a new phase of life in and of itself.
The prevailing attitude among a growing number of pre-retirees is that they are not going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control of their time and trade work that they no longer want to do for work they really like to do.
Retirement requires at least as much psychological and emotional preparation as it does financial preparation. Retirement planning needs to include a thorough assessment of personal assets ("human capital") and personal liabilities along with an assessment of financial assets and liabilities. It is no longer enough for retirees to know how much money they will need to live; they need to know how they will be able to make the most of this new stage of their lives.
By focusing primarily on financial issues, traditional planning reduces retirement to an economic event with its financial objectives marked by a finish line. The focus on numbers perpetuates the dangerous misconception that if you hit the finish line, on time and on goal, your planning is done and you’ll have a successful retirement. While you may have addressed the financial goal of creating a sufficient standard of living, you may not have addressed the larger, more important issue of the quality of life.
Welcome to the new normal in retirement planning.
*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2014 Advisor Websites.