THE WAY PEOPLE RETIRE is quite different than it was even 10 years ago. That means you need to change your way of thinking about retirement. If you are still planning for retirement like you did a decade ago, you could be in trouble.
Here’s a look at how retirement has changed over the past decade:
- Retirees are living longer.
- Retirement could last for several decades.
- Baby boomers have redefined retirement.
- A shift from pensions to 401(k)s.
- Becoming a millionaire is no longer enough.
- CDs and bonds generate less income for retirees.
- The 4% rule no longer holds.
- Historically low taxes.
- Grandparents as an ATM.
- Higher health care costs.
1. Retirees are Living Longer
Americans who have reached age 65 have a life expectancy of another 20 years, according Centers for Disease Control and Prevention data. The life expectancy at age 65 is another 20.6 years for females and 18.1 years for males. But most financial planners recommend that healthy people plan for an even longer life span in case you live that long. “If you are a married couple, chances are that one of you will live into your 90s,” says Dara Luber, senior manager for retirement product at TD Ameritrade. “You can’t plan for (living into your) 70s. You have to plan for life into your 90s.”
2. Retirement Could Last for Several Decades
Baby boomers might spend 25 or more years in retirement, which is a chance to do something new and meaningful. “Americans say it provides opportunity to meet goals and do all the things they couldn’t do when they were working,” Luber says. “It is an opportunity to pursue passions like travel, golf and hobbies, and maybe focus on health and wellness.”
3. Baby Boomers Have Redefined Retirement
Baby boomers have changed what it means to be retired. “Baby boomers are more active. They tend to spend more money,” says Jeffrey Corliss, executive director at RDM Financial Group in Westport, Connecticut. Many baby boomers have also needed to look for new ways to fund their retirement. “As planners, we’ve seen that retirement for our parents was a different environment than it is for baby boomers,” Corliss says. “A retiree 10 or 15 years ago would sell their house and move to Florida and be able to buy a house in cash or take money out of the sale. Now you can’t count on the appreciation that people of other generations have enjoyed.”
4. A Shift From Pensions to 401(k)s
Most retirees no longer have a traditional pension that provides guaranteed payments for life and are instead relying on the money saved for retirement in a 401(k) plan. “In the last 10 years I think retirement has changed mostly because we see more and more people having to live off of a 401(k) and less and less corporate pensions,” says John Iammarino, president and founder of Securus Financial in San Diego. “The decline in pensions has been ongoing for the last 30 years.” The proportion of private sector employees still covered by a defined benefit or pension plan was only 13% in 2018, down from 20% in 2008, according to Bureau of Labor Statistics data. The responsibility for saving for retirement has shifted from the employer to the employee.
5. Becoming a Millionaire Is No Longer Enough
People now feel that they need to save more money for retirement than they did a decade ago. A 2019 TD Ameritrade survey of 1,015 adults with at least $10,000 in investable assets found that 58% think $1 million in savings will be enough for a comfortable retirement. “In 2009, three-quarters of the Americans surveyed were comfortable accumulating less than $1 million (for retirement),” Luber says.
6. CDs and Bonds Generate Less Income for Retirees
Low interest rates mean that retirees are earning less money on savings in conservative investments like CDs and bonds. “The interest rate environment 10 years ago was different. Rates were almost double,” Corliss says. “The 10-year Treasury was around 4%. Now it’s 2%. That makes it difficult for savers and retirees to generate the income they used to.” For example, if you have $100,000 in savings it would have generated $4,000 when interest rates were closer to 4%. At a 2% interest rate, that same $100,000 in savings generates only $2,000 per year. “Given low interest rates, you need a bigger bucket of money to create the same income of people ten years ago,” Corliss says.
7. The 4% Rule No Longer Holds
The 4% rule states that if you draw down no more than 4% of your retirement assets per year you are unlikely to run out of money in retirement. However, Bryan Bibbo, an advisor at the JL Smith Group in Avon, Ohio, says the 4% rule may no longer be relevant, and could even get you in trouble due to today’s greater market fluctuations. “News is delivered faster and stocks move up and down faster,” Bibbo says. “It used to be that the market could go down 300 or 400 and it was a big deal. Now it’s common.”
8. Historically Low Taxes
The Tax Cuts and Jobs Act of 2017 pushed tax rates to historic lows. “If people think taxes will rise in the future, a golden opportunity presented itself to any investor of any age,” Iammarino says. You can take advantage of low tax rates by converting tax-deferred accounts to Roth accounts and paying the taxes now, while the tax rates are low. “Sometimes it makes sense to incur taxes now at the lower rate,” Bibbo says. “Say you are in the 12% tax bracket. You might want to do a Roth conversion and pay your taxes now, not knowing what you will pay in the future.”
9. Grandparents as an ATM
Between the skyrocketing costs of college and housing, young people are having more difficulty launching their adult lives. This often means that parents and grandparents are called upon for financial help. “These days, compared to 10 years ago, kids and grandkids are more on payrolls than ever,” Corliss says. “Either they have moved home or grandma and grandpa are paying for schools or cars. They might be surprised what they spend on kids, especially if they are on a fixed income.”
10. Higher Health Care Costs
Medical costs continue to go up. A 65-year-old couple retiring in 2019 can expect to spend $285,000 on health care expenses throughout retirement, up from an estimated $240,000 in 2009, according to calculations by Fidelity Investments. “People are getting new hips and new knees,” Corliss says. “Living longer requires more capital.”
A longer life expectancy changes how much you need to budget for health care. “Look at advances they are making in medicine. That puts a strain on retirement,” Iammarino says. “We have to understand that technology will be a double-edged sword. It will let you live longer, which is great, but that will put a strain on your assets.”