Retirement has changed in many ways over the last generation or two.  Here are some of the most important ones, and what you can do to plan for them.
Perhaps the most important change has been the increase in life expectancy. A century ago, life expectancy in the United States was 45 years. A few decades later when social security began in was 63 years. Today, a woman turning 65 is expected to live until 86 and a man is expected to live until 84. (Source: SSA) Retirement can easily stretch into 30 years, up to a third of your lifetime. Previous generations retired because they had to, they simply couldn’t work anymore. Today, many people consider retirement to be the culmination of their life’s work – an opportunity to enjoy life. Instead of sitting on the front porch with a glass of lemonade, today retirees are immersing themselves in hobbies, spending time and money travelling, dining out and pursuing all manner of recreation. These are all positive developments in retirement in the United States.
Another major change is how we are funding our retirements. Today, the reliance is on personal savings instead of pensions. As defined contribution plans like 401(k)s have replaced pensions as a primary retirement vehicle, the investment risk has shifted from the employer to the employee. In other words, the amount you have to spend in retirement is now at least partially determined by your skill and temperament as an investor. The main benefits of the rise of 401(k)s is that we’ve got much more freedom to change employers and the wealth that we are able to create can be passed on to our children and grandchildren if we are lucky and skilled in our investing and frugal in our retirement.
However, the investing environment is significantly different than it was a generation ago. The ‘70s were a poor decade for the stock market and interest rates were at record highs. What this has meant is the last thirty years have be an uninterrupted bull market for bonds (bond values go up when interest rates go down) and a pretty good market for stocks. Central banks around the world, including the Federal Reserve, have been very accommodating to markets. The next decade will not be able to sustain the bull market in bonds. At some point interest rates will increase and central banks will have to move away from their more accommodating stances.
Another challenge that will make our retirement different is the dizzying array of investment choices available today. Previous generations had stocks, bonds, CDs and other straight-forward investments. Low interest rates have necessitated looking beyond traditional investment choices in search of safe ways to earn a return. Unfortunately, this has meant that there are many more ways to get ripped off and many more ways to lose your nest egg. With retirement dollars in the hands of individual workers instead of the employer, financial intermediaries have popped up everywhere, from your bank to your insurance agency. Even as new, more complicated investment vehicles have cropped up, the old ones have changed as well. Past generations were able to take a small step away from the relative safety of bonds and CDs by investing in dividend paying stocks, like utilities and financial companies. Deregulation has made these industries much less of a “sure thing.”
The low interest rate environment has punished savers. If you need $3000 a month to supplement your retirement income, you would need a nest egg of $720,000 at 5% interest. At 1% interest, your nest egg must be $3.6 million! As a result, many people have abandoned an all-CD or all bond strategy. This can be a good thing, because adding some stocks to a portfolio might help to maintain the purchasing power of the nest egg by keeping up with inflation. However, it will also increase the volatility of the portfolio, and that can be a hard thing for some investors to accept. Hopefully, a silver lining of the current market turmoil will be a return to more normal interest rates.
In retirement planning as in life in general, change is the only constant we can count on. Some of the changes are positive, like longer lives and longer retirements. Some of the changes are challenging, like the current investment environment. Even though it is more complicated than ever before, we all have the opportunity to create a retirement that is not just different, but better, than our parents.’
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assure success or protects against loss. There is no guarantee that a diversified portfolio will enhance over all returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates and bonds are subject to availability and change in price.
CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Guarantees of annuity payments are based on the claims paying ability of the issuing company.
Asset allocation does not ensure a profit of protect against loss.
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