Is retirement the same thing it used to be?

The modern concept of retirement has only been around for about 100 years. Though relatively new, what retirement looks like and how people are planning for retirement has changed significantly in the last few decades. With roughly 9000 Americans reaching the average age of retirement everyday (65 years old) as of 2022, it’s important to be aware of these changes. Here are some of the significant changes you should be aware of.  

Retirees are living longer 

Due to improvements to modern medicine and other factors, people are living longer. Though this is of course a good thing, this in turn means retirees are living longer and need to plan accordingly. At age 65, retirees could potentially live another 20 years and if healthy could potentially live even longer than that. Financial planners are now having to plan for people to reaching the age 90+ years old. Without this planning, retirees may run out of assets in retirement and be in real financial trouble.  

How much Is needed for retirement 

One of the major and obvious changes to retirement is the amount of money you need to have saved to retire. What retirement looks like for everyone is different because there are a lot of factors that play into retirement like lifestyle, travel, and health. Traditionally, the recommendation for the average person is to save 15% of the annual income so that they can be able to withdrawal 80% of their final pre-retirement income for retirement. This 80% assumes annual expenses will decrease after retirement due to saving money on payroll taxes, savings accounts, and other work-related expenses. While some of your expenses will indeed be lower, some will increase. How much money you need to retire depends on your lifestyle, what you want to leave to descendants, and your age at retirement. With the cost of everything on the rise it’s safe to assume 80% of your final pre-retirement income may no longer be enough to live comfortably in retirement. 

4% rule may no longer hold 

Another common staple in retirement planning is the 4% rule. It basically states your annual 

withdrawal should not exceed 4% of your total retirement savings to have a 95% chance of not running out of money in retirement. The figure is based on historical data and has been a good guidepost as it relates to how much retirees should be withdrawing annually. With the current fluctuation in the market and people living longer than in previous decades, the 4% strategy may no longer be a viable one. To get more insight into the 4% rule and alternate strategies, such as the 3% rule, here is an article to check out: 4% Rule for Retirement.  

How retirement looks in 2022 

20 years ago, people would retire at 60 years old and go the traditional retirement route. Though traditional retirement is still popular, retirement is looking different for more and more retirees. Traditional retirement is defined as no longer working at all, and all your income in retirement comes from savings and social security. Another form of retirement is partial or semi-retirement. This is where a person is of the age of retirement and is collecting retirement benefits but still pursues a career, whether full-time or part-time, or the individual starts their own business and works for themselves. Lastly, there’s temporary retirement. This is where you would only retire temporarily and then resume working full time. With rising cost of living, these alternative retirements are becoming increasingly more popular. A lot of retirees are even waiting to retire until after age 66 or even longer beef up their retirement accounts before officially retiring which does have its benefits. These are definitely signs of changing times. For more information on the advantages of delaying retirement check out the following article here.  

Shift from Pensions to 401k Plans 

With the inception of the 401k plan, more and more employers are transitioning from their traditional pensions to this newer plan.  The 401k plan started in the 1980s and have continued to increase in popularity as the use of pensions decrease. One of the draws of 401k plans are they allow for more control than pension plans. These plans are contributed to by employees whereas pensions are funded by employers. This gives employees more control over how much they are putting away annually. 401k plans also allow for an employer match, meaning employers can match the contribution of their employees. Though pensions provide guaranteed payments for life, people are starting to increasingly bear the responsibility of saving for their retirements.

Increasing medical cost  

With new medical advancements, prices of medical cost continue to rise. A 65-year-old couple retiring in 2019 can expect to spend $285,000 on health care expenses throughout retirement, up from an estimated $240,000 in 2009, according to calculations by Fidelity Investments. With such high medical cost it’s now more important than ever to budget for medical expenses. Keep in mind, though medical expenses are likely to continue to rise, more medical expenses can mean more deductions on your tax return. To learn more about how you can take advantage of rising medical expenses check out this article here.

Final Thoughts 

Retirement isn’t what it used to be.  Pension plans are declining and Americans are increasingly on their own for retirement income and planning. This means it’s more important than ever to consider what you want your retirement to look like for you and have a plan in place to get there and remember execution is just as important as the plan. If you have any tax related questions about retirement or need information on where to find additional resources, please give Molen & Associates a call today at (281) 440-6279. We’d love to help.

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