When an American retired in the 1950s or 1960s they often did so with a full pension, Social Security and a life expectancy of nine or 12 years in retirement. The future retiree should expect less income from corporate pensions and government entitlements and perhaps 25 or more years of active and/or assisted retirement years. Longer life spans and advancements in quality of life, combined with a changing Social Security program is giving rise to new retirement investing ideas and trends.
A Different Approach to Retirement Planning
Advancements in public health, food science, sanitation, pharmacy, surgery, and “wellness-oriented lifestyles” have resulted in longer life expectancies. A recent article in the Washington Post revealed scientists have successfully edited the DNA of human embryos to “erase a veritable heart condition” cracking open the doors to a controversial new era in medicine. While such advancements are received with both excitement and horror, they probably require a different approach to retirement income planning, retirement healthcare and custodial care strategies. (For related reading, see: How Long Will You Live? This Tool Will Tell You.)
When Social Security was enacted in 1935, guaranteeing retirement pensions to all Americans over 65, the average American life expectancy was 61.7 years and the percentage of people over age 65 was less than 6%. Today those 65 and over comprise 12% of our population, expected to hit 19% by 2030. The country's population, in general, has a distinctly older age profile than it did even 15 or 20 years ago, a trend that is expected to continue.
The retiree of the 1950s and 1960s could often park whatever retirement money they had in safe income-oriented investments while relying primarily on pensions and entitlements. Future retirees will need to be more cognizant of having their savings exceed - or at the very least - keep pace with inflation, which will have a pronounced effect on livings standers and healthcare costs of an extended time.
Keeping Up With Inflation
For many retirees, the most practical way to match or exceed inflation is by investing in broadly diversified mainstream public equities. A distrust in markets and public companies has caused many retired investors to shun public equities in favor of other investments, such as real estate or savings accounts, which often results in either too much risk and illiquidity or not enough inflation protection.
Today, there are a plethora of ways for retired investors to gain exposure to a diversified pool of public equities. According to Statisa, there are 9,511 mutual funds and at least 2,000 exchange-traded funds, many of which invest in mainstream equites. The key for tomorrows retiree is too rise above the noise of the markets and media and invest in these vehicles pursuant to an investment policy statement and appropriate asset allocation. This will offer the investor a relatively simple approach to funding retirement spending and healthcare costs, adjusting for inflation, over a significant time.
Extra years in retirement or semi-retirement can be a blessing or a curse. Understanding the latest trends and embracing the proper investment approach can improve your odds that it’s a blessing and help contribute towards financial security and peace of mind later in life. (For more, see: How to Hedge Longevity Risk With Annuities.)