Why Boomer Retirements Will Be Vastly Different Than What They Planned For
It seems like every day there is new piece in the financial press about the “new retirement” or some similar topic. As much as I hate labels from the press, as a Baby Boomer I have to agree that retirement for my generation is different than for previous ones.
First off, life expectancies are increasing. Secondly, we are staying active longer. Third, medical costs for retirees continue to increase. Last but not least, by many accounts there is a retirement savings crisis in the U.S. Navigating a successful retirement takes a lot more planning than it did in the past. And financial advisors are uniquely positioned to help their clients navigate the sometimes tricky waters of retirement. (For related reading, see: Least Expensive States to Retire In.)
The Impact of Living Longer
Longer life expectancies have put an added strain on retiree’s nest eggs. This is simple math. For clients who will largely depend upon investment accounts such as an IRA, a 401(k) and taxable investments, this means that they will need to accumulate a larger sum to fund a longer retirement and may need to invest a bit more aggressively than might be expected for a retiree.
The good news is that the concept of a phased retirement is becoming more prevalent. For your clients, this can mean scaling back work on a gradual basis before full retirement, working in a career of their choosing, and in some cases, starting a new business. Generating even a portion of the income earned prior to retirement can help make your client’s nest egg last longer. This represents money that will not be withdrawn from the client’s accounts that can remain invested for further growth.
Longer life expectancies make the need for financial planning prior to retirement and during retirement even more critical. Ideally this process begins a number of years prior to clients' retirement dates. How much will they need to accumulate by retirement? Are they on track? How will they deal with rising health care costs? Will they potentially outlive their retirement savings?
Pre-retirement planning can help your clients identify any gaps they have financially and allow them time to make adjustments. Do they need to save more? Do they need to scale back their planned lifestyle? What impact will working for a few years into retirement have on their situation? When and how should they file for Social Security? (For more, see: The Worst States for Taxes During Retirement.)
Some other planning considerations include:
- Depending upon which predictions you believe, there is some concern that Social Security may not be available, either at all or at a reduced level, for those currently younger than about 55 years of age. Planning for these clients should take this possibility into account.
- A key component is to identify all potential sources of retirement income for clients including their retirement accounts, taxable investments, interests in a business, pensions and Social Security and others. If there are steps that need to be taken to ensure some of these sources — like old retirement accounts — are still viable, they should be taken early on.
Working in Retirement
Working during retirement can be mentally and financially therapeutic. Many people are still active and don’t just want to play golf or go fishing every day. Interaction with other people, too, is a key benefit. Earning all or part of the cash flow needed during retirement for even a few years can make a big difference between a retiree worrying about running out of money vs. allowing their nest egg to potentially grow and last quite a bit longer.
This also can allow clients who might have needed to take Social Security as early age 62 to push it back to their full retirement age of 66 (67 if born in 1960 or later) and possibly back to age 70. Delaying Social Security offers the opportunity to collect a larger benefit initially and throughout their lives as cost of living increases are now based off of a higher initial benefit amount.
Planning for Social Security
When to claim Social Security is a key question for your clients. As mentioned earlier, waiting will increase the benefit. The difference between claiming a benefit at age 62 and age 66 is about 30%, while waiting until age 70 adds about another 32%. Additionally, for married couples, there are some claiming strategies that can ramp up their combined benefits. (For more, see: Top Tips for Minimizing Taxes on Social Security.)
Many future retirees are concerned that Social Security will either not be there for them or will provide a reduced benefit. We’ve seen lower cost of living increases in recent years with the country’s low rate of inflation but some say these increases are even lower than they should be given current inflation. This is an area where a knowledgeable financial advisor can add value.
Another retirement consideration is the cost of healthcare. The general increases in medical costs alone are enough to put a strain on any retiree’s budget. Add to this the staggering increases in some prescription drug costs and I’m certain that retiree healthcare costs will continue to consume an ever increasing part of many retirees’ budgets. Including Medicare premiums, the cost of prescription drugs and cost for medical care a typical couple in retirement can expect to spend is close to $200,000.
Staying active and fit both mentally and physically can help keep these costs in check.
The Bottom Line
The retirement landscape is changing and will certainly continue to evolve. Continued financial planning will be needed as your clients live longer and as their situations invariably change over time. Perhaps costly medical problems will arise, perhaps they will decide to change locations or perhaps they will become bored with retirement. These and many other changes in circumstances will require the guidance of a qualified financial advisor. (For more, see: Avoid These Retirement Portfolio Mistakes.)