The retirement planning landscape is constantly changing, and the strategies of previous generations may not meet the needs of today’s retirees. Following are five forces shaping retirement in recent years that are important to consider as you plan for the future.
1. Longer life expectancies
While an increased lifespan is great news for those of us hoping for a long and happy retirement, it means today’s retirees may need to have enough savings to last for 20 to 30 years — or even longer. It’s now more important than ever to carefully plan for your income needs in retirement, which could mean taking a more long-term approach to saving and investing than retirees from previous generations.
2. Market volatility
While investors with long investing timeframes can stand to weather market volatility, those who plan to retire in times of volatility may have additional challenges to navigate. That’s because market volatility early in retirement can lead to sequence of returns risk. This is the risk of being forced to withdraw from your portfolio during a market downturn (as your investments are losing value) early on in your retirement.
When you’re forced to sell out of equities at a decreased value, you must sell more shares in order to receive a certain amount of assets, which can cause you to drain your retirement savings more quickly. In addition to selling at a loss, you’re also removing assets from the market that could have otherwise been poised to generate growth as the market recovers. To mitigate this risk, it’s important to maintain a diversified portfolio focused on long-term growth.
3. Defined contribution retirement savings
In contrast to previous generations, most of today’s retirees aren’t covered by an employer pension plan. This shift from pensions to defined contribution plans (such as 401(k)s and 403(b)s) is significant because it places the responsibility of saving for retirement firmly on the employee.
Today’s defined contribution plans rely on employees to make contributions from their paychecks to fund their retirement accounts. While employers often offer some type of matching contribution, the employee typically must contribute a certain salary percentage to receive the match. As these individuals begin to leave the workforce, they’ll need to make sure they have enough retirement savings to support their needs throughout retirement.
4. Nontraditional retirements
Recent shifts in the way people work are also impacting how they retire. Opportunities in the gig economy and flexible work arrangements make it easier than ever to continue to live in a state of semi-retirement. Doing so allows many would-be retirees to continue earning an income while also finding plenty of time for leisure activities, travel, and hobbies.
While this shift reflects a growing desire among retirees to continue maintaining a sense of purpose and structure throughout their retirement years, it also reflects the financial reality that many people need to continue working later in life in order to fund their retirement expenses. Many Americans can no longer depend on Social Security and pensions to provide financial security throughout their later years.
5. Technological advancements
More retirees are using technology to help them plan for retirement. Digital apps and online tools can help you manage your savings, investments and healthcare expenses right from your phone or computer. New technology also allows you to interact with your wealth manager, model various retirement and investment scenarios, and track progress toward your financial goals.
This commentary is provided for general information purposes only; should not be construed as investment, tax, or legal advice; and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
AJ Kratz, CFA, CFP, is a Private Wealth Manager and Partner with Creative Planning. Creative Planning is one of the nation’s largest registered investment advisory firms, providing comprehensive wealth management services to help align all elements of a client’s financial life, including investments, taxes, estate planning, and risk management. For more information, or to request a free, no-obligation consultation, visit creativeplanning.com.