If you gave any thought to retirement back when you were younger — in the ’80s, ’90s or early 2000s — you probably expected to follow the same path your parents and grandparents did.
After years of working hard, you would have a nice company pension to rely on. You would claim Social Security sometime between 62 and 65. And though your house likely would be your biggest asset, you’d also put some money into certificates of deposit, or maybe your 401(k) at work, so you could spoil your grandkids, maybe retire to Florida, or play golf with your fellow retirees at the club.
Unfortunately, it hasn’t quite turned out that way for many modern-day retirees.
Times have changed. Financial planning is far more complicated than it used to be. And if you haven’t already done a few course corrections on your path to retirement, you may need to find a new guide or risk losing your way.
That Old Three-Legged Stool Is Getting Wobbly
The days when Americans could depend on three main sources of retirement income — a pension, Social Security benefits and personal savings — are just about over. Despite dire predictions, Social Security is still around. But since the 1980s, employers have shifted away from offering defined-benefit pensions that provide a guaranteed monthly income for workers in retirement. Instead, most employees now have only a 401(k) and any other savings they’ve managed to sock away to count on when they retire. And if they aren’t saving enough, or they don’t invest their money wisely, or their timing is off and they retire just as the stock market is correcting or crashing, their retirement dreams could look a lot different than what they planned.
Americans, on Average, Are Living Longer
Americans who reach age 65 in 2021 can expect to live another 20 years or so, according to the Social Security Administration’s Life Expectancy Calculator. But most financial advisers say if you’re healthy, you should probably plan for an even longer retirement. If you retire in your 60s, your money might have to last 30 years or more.
On the plus side, you’ll have more time to pursue a new hobby or to spend time with your family. But you’ll have to make your savings stretch. If your adviser is urging you to delay claiming your Social Security benefits until your full retirement age or, even longer, until you’re 70, this is why. The longer you can put off filing, the bigger your monthly check will be. And if you live a long life, the waiting should pay off.
The Old Ways of Saving May Not Be Enough
Remember back in the ’80s, when your parents and grandparents were getting double-digit yields on certificates of deposit — and you were paying double-digit interest rates on your first mortgage? Now that you’re ready to save safely, CDs are paying 1% or less, and borrowers are getting mortgages with interest rates of 3% or less.
That’s great for your kids, but if you’re looking for a low-risk place to put your savings in preparation for retirement, you may have to look for alternatives to old standards like CDs and bonds. Or you’ll have to save a lot more to create the same amount of income.
That Million-Dollar Benchmark Might Disappoint
Even if you have $1 million in your retirement account, you may find it isn’t enough. That number was the gold standard when pensions were a given. But if you won’t have that reliable income stream — and you want to keep the same lifestyle you had pre-retirement — you might need to save closer to $2 million or more. And don’t forget, if most of your retirement savings are in a tax-deferred account (a 401(k), 403(b), traditional IRA, etc.), that money doesn’t all belong to you. You will pay taxes on the withdrawals.
So, what should your priorities be as you plan for a modern-day retirement? Here are a few things to consider:
- Know Your Numbers. Sit down and plan out what you expect your costs to be, and be prepared to adjust for inflation, higher taxes and higher health care costs as you age. Then determine what your income streams will be, and how much you’ll withdraw each year. Hope for the best but plan for the worst-case scenario. This can help you determine how much you’ll need to save before retirement and how you’ll want (or need) to keep your money invested after you retire.
- Play Catch-up. If you were taking an old-school approach to retirement, and planning on a pension that disappeared, it’s not too late to make personal savings a priority. Traditional and Roth IRAs and 401k(s) offer catch-up contributions for those 50 and over. Take advantage of the opportunity to build your retirement assets.
- Talk to a Retirement Expert. It’s unlikely the plan that got you where you are today is the plan that will get you through retirement — even if it was a good one that left you with a decent pot of money, and even if a pro helped you put it together. Most financial professionals are good at helping their clients accumulate money. But in retirement, you need an adviser knowledgeable about the next stage of financial planning. You need someone who can help you preserve what you have, determine the best withdrawal plan for your retirement goals, help you plan a legacy if that’s important to you, and so much more.
Kim Franke-Folstad contributed to this article.
Founder, Retirement Income Strategies
Kristian L. Finfrock is the founder of and a financial adviser at Retirement Income Strategies. He is an Investment Adviser Representative of Kalos Capital and a licensed insurance professional. He resides in Evansville, Wisconsin, with his two daughters.
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