And How to Prepare Financially
Retirement today doesn’t much resemble the retirement of past generations, as more retirees are living longer and choosing to remain in the workforce. And many of today’s retirees view retirement as a new chapter of life, not simply the end of a career. With these changes come retirement planning challenges. Following are four key ways the retirement landscape has shifted and tips to help you prepare.
#1 – Changing employment patterns
Americans today are working later into life than previous generations, and several recent studies have shown a rising trend of older retirees returning to the workforce. According to Pew Research, individuals age 75 and older are the fastest growing age group in the workforce, and this worker demographic has more than quadrupled in size since 1964.1
A survey conducted by Resume Builder found that one in eight retirees between the ages of 65 and 85 reported they’re likely to return to the workforce in 2025. This is in addition to the 22% of seniors who are already working. And four out of 10 seniors who are currently working were once retired.2
Why are seniors continuing to work, or returning to work, later in life? One main reason is due to money worries, as many Americans discover that recent increases in the cost of living are draining their retirement savings more quickly than anticipated. In fact, 69% of retirees considering a return to work state that an increased cost of living is a main reason.3
One of the best ways to plan for a secure retirement and avoid a return to the workforce is by working with a wealth manager to develop a comprehensive financial plan. Your wealth manager can help you stress test a wide range of retirement scenarios to predict how your retirement savings may hold up under different conditions. This information can inform your financial plan and help ensure you have enough assets to last a lifetime, even when unexpected circumstances or economic conditions arise.
#2 – Longer life expectancies
Research has shown that retirees’ biggest financial fear is the possibility of outliving their assets.4 Referred to as longevity risk, the possibility of running out of assets in retirement increases the longer you live. Fortunately, there are several steps you can take to help ensure you don’t outlive your assets, such as:
- Delaying Social Security benefits – Delaying Social Security benefits until you reach age 70 can provide you with an additional 8% each month, adjusted for inflation. While it takes time for the increased monthly benefit to make up for the years you delayed receiving benefits, most retirees break even in their early- to mid-80s. If you live for an additional 10 years, the increased monthly amount can have a substantial impact on your overall retirement income.
- Intentionally allocating your investments – With the potential to live for 20 to 30 years in retirement, it’s important that your portfolio continue growing to keep up with inflation. A big mistake many retirees make is investing too conservatively in an effort to shield their assets from market volatility, which can result in a long-term loss of purchasing power. At Creative Planning, we typically recommend our clients maintain five to seven years of living expenses in safer assets, such as bonds, while investing the remainder in a diversified portfolio designed for long-term growth. This strategy is designed to help manage your living expenses during market volatility and may assist in making informed decisions about selling stocks. Your wealth manager can then help you identify opportunities to sell stocks at a profit to replenish your bond portfolio and continue funding your lifestyle expenses.
- Planning for healthcare expenses – Healthcare is one of the largest expenses faced by many retirees, which is why it’s important to make a plan to pay for these costs. Consider saving in a health savings account (HSA) while you’re still employed, as these tax-advantaged funds can be used throughout retirement. You may also want to consider purchasing a Medicare supplement plan to help pay for expenses not covered by Medicare. Your wealth manager can help you evaluate your options and choose a plan that’s right for you.
#3 – A shift from defined benefit to defined contribution retirement plans
One of the most significant changes in retirement planning over the last few decades is the decline of traditional pensions, also known as defined benefit plans. These plans specified the amount of retirement income workers would receive from their employers as well as the length of time they’d receive those retirement benefits.
Over time, defined benefit plans have been replaced by defined contribution plans, such as 401ks, 403bs, etc., which shift the responsibility for saving from the employer to the employee. Defined contribution plans are, essentially, employer-sponsored savings vehicles that allow employees to defer a portion of their salary and, at the employer’s discretion, receive a matching contribution.
The shift to defined contribution plans makes it more important than ever to start saving early and continue saving throughout your entire career. Your wealth manager can help you establish a savings strategy and investment allocation to help set you up for long-term success.
#4 – Technology
Technological advancements are making it easier than ever to save for retirement. Automatic retirement plan features, such as auto-enrollment, automatic payroll deductions and automatic contribution increases, are helping employees save more. And mobile apps help individuals easily access and manage their investments, budget and save for the future.
Retirement modeling software is another helpful technological tool that has the potential to improve your outcomes. Your wealth manager can run various scenarios to stress test your retirement savings and help ensure you remain on track to weather a wide range of challenges.
