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The Modern Road to Retirement - What Has Changed?

February 12, 2018

The traditional view of retirement was created in your grandfather’s day, the 1950’s.  Funding for retirement was provided by the “3 legged stool”, Social Security, Company Pension Plans and Personal Savings.  Company Pension Plans together with Social Security often took care of the bulk of the financial requirements, and personal savings provided frosting on the cake.

The modern road to retirement has changed dramatically.  Everyone is now responsible for defining and funding their own retirement, and it’s no secret that many are reaching retirement age unprepared and alarmingly underfunded.

No More Company Pension Plan

There’s really no question that the slow death of the pension plan has been a giant blow to individuals' retirement savings.  Back in the day, a company enrolled you in its pension plan.  You didn't have to make contributions; it was fully funded by the employer.  You just kept on working, gradually becoming vested in the plan.  Once you retired, you had a lifetime payout to augment Social Security benefits.

Today, the 401k plan reigns supreme.  It costs companies less, mandates employee contributions, and puts the burden of making contribution and investment decisions on the employee.  Unfortunately, studies have found that pension plans easily outperform 401k's, and the sums accrued by 401k’s are proving inadequate for most people.

Social Security Begins Later

There are always questions as to the longevity of Social Security, although it's generally felt that solutions will be found.  In the future, however, it is prudent to expect that Social Security will cover less of the cost of retirement than it does now.

You can blame the Social Security Administration (SSA) for this one.  For decades, the "full retirement age" – that is, the age at which you could start collecting full Social Security benefits – was 65.  This never changed, even though people continued living longer, draining the social security system.  But as the SSA has looked for ways to cut costs, and to adjust for longer life expectancies, it is now age 67 for anyone born in 1960 or later.

We Are Living Longer

Statistically speaking, you should plan to live longer than your parents.  In 1960, the average life expectancy was nearly 70 years old.  Today, it’s about 79 with a growing number living into their 90’s, and even over age 100!  This ranks as one of society’s greatest achievements, but financially, this longevity risk presents problems – primarily, the risk of running out of money.  Living longer requires money for more years, perhaps as many as 25-30 years. Today’s retiree needs a bigger nest egg at a time when it’s harder to save.  On the other hand, a longer, healthier retirement means more years to enjoy your family and your life.

An Active Stage In Life

Retirement is now an active stage of life.  Most people no longer dream of sitting around on the front porch in a rocking chair.  Instead, partly because we face many more post-career years, we are re- imagining retirement as an active and constructive stage of life, whether it involves volunteering for a favorite cause, travelling, developing a new skill, becoming active in community affairs, or continuing to work.

People Working Longer

Choosing to work into one’s 70’s and 80’s may be an option for several reasons.  While the Great Recession, combined with less than adequate savings, provides some people with no other option, others actually enjoy their work or identify with their profession and don’t want to give it up. As part of an active retirement lifestyle, work can be a way to stay active and maintain mental acuity, as well as provide a source of income. Work can be combined with leisure in new and interesting ways.  Some people are able to shift from full-time to part-time work, perhaps taking on a new role that is less demanding or more satisfying.  Others opt for an encore career, retrain for a new job, start a business or turn a longtime hobby into a money-making endeavor.  Unfortunately, work may not always be an option for many individuals who want to work longer.

More Personal Responsibility

Perhaps the biggest change of all from our grandfather’s day is the need for individual action.  With the vision of retirement being redrawn before our eyes, the responsibility of planning ones retirement is now squarely on the shoulders of each individual. Whether you are in your 30’s or your 50’s, it is never too early or too late to start the planning process. Life is hectic, and no matter the stage you are in, the planning process may seem daunting and retirement may seem to be far into the future.  While the vision of retirement will likely evolve, the time to start the process is now.


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