December 18, 2015
The Scope of Retirement has Changed
The rules of personal finance have changed over the past generation. It was at one time, generally true that “you can’t lose money in real estate”. It was also true that companies had pensions but in the 21st century individuals must now take more personal responsibility for their retirement finances. I once heard the baby boomers referred to as the YOYO generation- You’re On Your Own. And this as life expectancies increase and personal savings rates remain low. Obviously there are numerous reasons for this with everything from the decline of defined-benefit pensions to the shrinking of Social Security and health benefits, not to mention the worst economy since the Great Depression. Here are some key ways your retirement will be different from that of previous generations of retirees and options to consider.
Longer or second careers. Many people will continue to work past the traditional retirement age because they need the income and/or enjoy the social interaction and other benefits a job can provide. My dad for instance recently signed on to assist doctoral students prepare for their dissertation at the age of 83. One of the new realties is that there is and will continue to be less employer financial help. Employer retirement benefits have become considerably less generous over the past several decades. “For some time now, the trend has been that individuals are going to be responsible for more and more of the financing of retirement,” says Bob Carlson, author of The New Rules of Retirement: Strategies for a Secure Future.
Lower Social Security benefits. Future retirees will have less of their pre-retirement income replaced by Social Security than current retirees enjoy. Workers born in 1937 or earlier were able to claim the full amount of Social Security they were entitled to at age 65. But the full retirement age has increased: those born between 1943 and 1954 age 66, and 67 for those born in 1960 or later. People who sign up at age 65, despite the now-higher full retirement age, will receive a reduced payout.
Living longer. Baby boomers born in 1946 can expect to spend an average of 18 years in retirement if they are male, and 20 years if they are female, according to Social Security Administration projections. For those born in 1980, the length of retirement for men will grow to an average of 19.3 years and 21.2 years for women, even after factoring in the higher Social Security retirement age. “A number of people are probably going to spend more years in retirement than they did working,” says Carlson.
Work with a team Sam Levenson once commented that “You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.” Find a team, including a financial advisor and tax expert, and make sure they have others in the same position that you are in and have some strategies that are tried and true. Individuals are now responsible for building their own nest egg, shifting money into age-appropriate investments, while also earning enough return to make your money last for the rest of your life. Managing your own investments requires vigilance and working with your team can give you some additional perspectives, expertise, and objectivity. “Your spending formula should be flexible, and vary based on investment returns and spending changes you have,” says Carlson. “
Manage your taxes. Not all of the money you’ve stashed in a traditional 401(k) and IRA is available for spending in retirement. Income tax will be due on each withdrawal. “People need to pay attention to the tax rules and master all the strategies for taking money out of an IRA,” says Carlson. “Anything you can do to reduce taxes is going to give you more money to spend.” Retirees need to space out withdrawals to minimize their tax bills and remember to take required minimum distributions after age 70½ to avoid a tax penalty. Also, consider pre-paying income tax on some of your contributions, using a Roth account to add flexibility and tax diversification to your portfolio.
Test it out. Having enough money to retire comfortably is no guarantee that you will enjoy being retired. Taking an extended vacation or gradually shifting to part-time work are both good ways to see if you will enjoy a permanent exit from the workforce. Taking the time to plan your retirement and consider all of your options is critical to having an interesting and productive next phase of your life.
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