Retirement is Changing Fast: How to Keep Up

For those who are already retired and for those within a few years of retirement the landscape is changing. Americans are living longer which puts a strain on their ability to fund a comfortable retirement that will last over these longer life expectancies.

The notions of traditional retirement are evolving and the retirement landscape is changing in many ways. Here are a few thoughts and examples.

We're Living Longer

The average life expectancy continues to increase and so does the time we spend in retirement. Many retirees are also active for a longer period of time due to improvements in health and health care. We are living longer which alone puts a strain on our retirement nest egg. Add to this the increasing cost of healthcare in retirement and it is tougher for retirees to ensure they don’t run out of money.

A longer life expectancy puts an incredible strain on a retiree’s nest egg. Even the famous “4 percent rule” surrounding the level of retirement withdrawals that can reasonable be sustained only assumes a 30 year retirement. If someone retires at 65 and lives to 100 that’s 35 years; for someone who retires at 60 and lives to 100 that’s 40 years. (For related reading, see: Common Risks That Can Ruin Your Retirement.)

The Financial Services Industry to the Rescue

To nobody’s surprise the financial services industry is hard at work developing new products to help retirees manage their longer life expectancies. Longevity annuities seem to be all the rage these days. (For more, see: What is a Longevity Annuity?)

The Treasury Department and the IRS recently approved the use of longevity annuities in target-date funds within 401(k) plans. These annuities are deferred until age 85 an age at which some retirees may have spent through some or all of their nest egg. The rules also allow these deferred annuities in IRA accounts as well.

Besides annuities tailored to retirement accounts the insurance industry has been rolling out new wrinkles on annuities for years including various forms of equity-index annuities and immediate annuities. (For more, see: Longevity Annuities Arrive in 401(k) Plans.)

Whether a QLAC (qualified longevity annuity contract) within your 401(k) or individual retirement account (IRA) or any other type of annuity, clients should seek out the help of a fee-only financial adviser to help them determine if any of these types of products are appropriate for them. 

Phased Retirements

With factors like increased longevity and improving health among many retirees we have seen a trend towards a phased retirement in recent years. This takes different forms for different people. 

In some cases employers have established formal phased retirement programs where employees can work a reduced number of hours. This allows the employer to retain the knowledge and skills these employees possess and allows the employee to transition into retirement. The financial benefits can be significant as well in terms of not only their cash compensation but in many cases the continuation of employee benefits.  This money is money the employee doesn’t have to take from their own resources. (For more, see: Tips for Transitioning Your Client from Earning to Drawdown.)

Phased retirement can also entail transitioning to self-employment or a different job upon leaving your prior employer. Many people are using retirement to finally pursue a business or line or work that they have always wanted to be involved in. (For more, see: Advisors: Have Clients Try on Retirement for Size.)

Whether via a formal phased retirement program via your employer or one of your own design here are a few things to consider:

  • Will reduced earnings have a negative impact on your Social Security benefits once you claim them? Additionally, if you're taking Social Security while still working once your earnings hit $15,720 your benefit will be reduced $1 for every $2 dollars of earnings. (For related reading, see: 4 Unusual Ways to Boost Social Security Benefits.)
  • Will a phased retirement program impact your pension benefit with your employer?
  • How will you cover your healthcare needs especially if you are under age 65? If you are doing this with your employer check as to how this type of arrangement impacts your health insurance. If you are going out on your own or to a different employer you will want to get this squared away beforehand. If you are married and your spouse has coverage you may be able to get yourself covered under their policy. With the advent of ObamaCare this might also open up some options for you. Be sure to prepare financially for any increase in these costs however. (For more, see: Planning for Healthcare Costs in Retirement.)

New State Initiatives

Illinois recently became the first state to approve a retirement plan that makes offer the ability to all workers to defer money for retirement even if their employer doesn’t offer a 401(k) or similar retirement plan.  Other states are considering similar plans. (For more, see: Retirement Plans for All? These States Say 'Yes'.)

Emphasis on Pre-retirement Planning

The interest among employers in terms of offering financial education including advice on retirement planning has increased.  Many companies offer their employees access to financial education tools both online and in some cases via live onsite sessions. (For related reading, see: 5 Crucial Tips for Your Retirement Income Planning.)

Additionally access to advice for 401(k) participants is increasingly more common as well. Target-date funds and other pre-allocated portfolios are one form. Investment advice is offered via many plan providers such as The Vanguard Group and Fidelity Investments, as well as from other vendors. Some of these services focus only on the money in the participant’s 401(k) account; others will take outside investments into account as well. (For more, see: How Advisors Can Manage Evolving Retirement.)

Low Interest Rates

The low inflation that we’ve seen over the past few years is generally considered a good thing. However, this same environment has also produced ultra-low interest rates which have been problematic for retirees looking to generate steady, low risk income from bonds as well as depository vehicles such as money market accounts and CDs.

With interest rates so low investors may be tempted to stretch for income to areas such as dividend-paying stocks, high-yield bonds and other investments that might throw off income but carry more risk than more traditional fixed income investments. (For more, see: Retired or Near-Retirement? Check Out These Multi-Asset Income ETFs.)

Make no mistake that dividend-paying stocks are still stocks and carry the risks inherent with investing in stocks. While high-quality dividend paying stocks may well hold their value better than many lower quality names in a market downturn, there is still a substantial risk of loss in a market downturn.

The Bottom Line

Retirement today is different than the retirement of our parents and grandparents. Retirees are living longer which puts addition stress on their retirement nest eggs in this era of 401(k) plans and fewer pension plans. For many retirement might not be the full stoppage of work and living a life of leisure but rather one of phasing out of the workforce over a period of years. This changing retirement landscape provides a great opportunity for financial advisers to help clients in retirement, those approaching retirement as well as younger clients with a number of years until retirement. (For more, see: Retirement Planning in a Changing World.)