Why Today’s Retirees May Need to Plan Differently
The retirement planning landscape is constantly changing, and the planning strategies of previous generations may not meet the needs of today’s retirees. Following are five forces shaping retirement in 2025 that are important to consider as you plan for the future.
Key Takeaways:
- Because people now live longer, retirees need additional savings.
- Failing to plan for sequence-of-returns risk can potentially impact the performance of a portfolio.
- With pensions no longer common, the burden of saving for retirement has fallen to employees.
#1 – Longer life expectancies
The number of Americans aged 90 and older has tripled since 1980, and there are now nearly 2 million people older than 90 years of age living in the United States. That number is expected to increase to more than 7.6 million over the next 40 years.1
While this is great news for those of us hoping for a long and happy retirement, it means retirees today may need to have enough savings to last for 20 to 30 years, or even longer. This means it’s more important than ever to carefully plan for your income needs in retirement, which could mean taking a more long-term approach to saving and investing than those in previous generations.
#2 – Market volatility
The start of 2025 was a volatile time in the markets. While investors with long investing timeframes can stand to weather storms like these, those who plan to retire in times of volatility may have additional challenges to navigate.
Why? Because market volatility early in retirement can lead to sequence of returns risk. This is the risk of being forced to withdraw from your portfolio during a market downturn (as your investments are losing value) early on in your retirement.
When you’re forced to sell out of equities at a decreased value, you must sell more shares in order to receive a certain amount of assets, which can cause you to drain your retirement savings more quickly. In addition to selling at a loss, you’re also removing assets from the market that could have otherwise been poised to generate growth as the market recovers. Doing so can be devastating if it occurs in the early years of your retirement, as you may not be able to recover from such a loss.
On the other hand, if a market downturn occurs later in your retirement, it may not have as big of an impact on your overall savings, as you likely won’t need your assets to last as long.
Consider the following chart, which shows two investors who both enter retirement with $1 million in savings. Both investors take initial withdrawals of $50,000 and increase their withdrawal amount by 2% each year to account for inflation. Both investors also experience a 15% market drop; however, the market drop occurs during the first two years of Investor 1’s retirement and in the 10th and 11th years of Investor 2’s retirement.
As you can see, the market decline has a much more drastic impact on Investor 1’s portfolio, making it virtually impossible for Investor 1 to recover the lost assets during their lifetime.
Fortunately, there are several strategies you can implement to help mitigate sequence of returns risk. Your wealth manager can make sure your portfolio is properly structured to help you navigate this risk.
#3 – Defined contribution retirement savings
Recent years mark the first time in history that the majority of retirees’ sole source of employer-sponsored retirement savings is through defined contribution plans. In contrast, retirees born prior to 1960 were likely covered by some type of pension, also known as a defined benefit plan.
This is a significant milestone, because it represents a shift in the responsibility of saving for retirement from the employer to the employee. Prior to the introduction of defined contribution plans, such as 401(k)s, 403(b)s, etc., employers would offer pensions to guarantee employees a certain monthly income in retirement based on their years of service and salary.
In contrast, defined contribution plans rely on employees to make contributions from their paychecks to fund their retirement accounts. While employers often offer some type of matching contribution, the employee typically must contribute a certain salary percentage to receive the match. This puts the responsibility of saving for retirement firmly on the shoulders of employees. As these individuals begin to leave the workforce, they’ll need to make sure they have enough retirement savings to support their needs throughout retirement.
#4 – Non-traditional retirements
Recent shifts in the way people work are also impacting how they retire. Opportunities in the gig economy and flexible work arrangements make it easier than ever to continue to live in a state of semi-retirement. Doing so allows many would-be retirees to continue earning an income while also finding plenty of time for leisure activities, travel and hobbies.
While this shift reflects a growing desire among retirees to continue maintaining a sense of purpose and structure throughout their retirement years, it also reflects the financial reality that many people need to continue working later in life in order to fund their retirement expenses. Many Americans can no longer depend on Social Security and pensions to provide financial security throughout their later years.
#5 – Technological advancements
More retirees are using technology to help them plan for retirement. Digital apps and online tools can help you manage your savings, investments and healthcare expenses right from your phone or computer. New technology also allows you to interact with your wealth manager, model various retirement and investment scenarios, and track progress toward your financial goals.
