People are retiring (living) for a lot longer.
The Social Security system hasn’t been around for even 100 years yet. When it began making regular payments to Americans back in 1940, the average retirement age was 65… and so was the average life expectancy for those that made it to adulthood. At birth, the life expectancy was actually only 58 due to the high infant and child mortality rate. It was normal to work your entire life and then pass away after only a very short (if any) retirement. Oh, how things have changed!
Life expectancy has risen dramatically over the past century and today is almost up to age 80. By the year 2060, it is predicted to be almost 90. The number of centenarians is on the rise and we have people living over the age of 115 now!
A trend that is moving in the other direction though, is the average retirement age. Steadily declining, the average age of retirement in the U.S. is now age 62, which conveniently lines up with the age that one is able to start their Social Security.
With a declining retirement age and an increasing mortality age, retirements are getting longer and longer every year. The idea of a 30+ year retirement is something very new, and hard for most to wrap their minds around as it is something almost no one has experience with yet!
This social issue is a big one in today’s retirement planning landscape. It is difficult enough to plan for a 30+ year retirement, but it is impossible to plan for a retirement that you can’t even properly envision. This conundrum leads to a whole host of other modern retirement planning issues.
Life expectancy (from birth) in the United States, from 1860 to 2020*
Retirees are fighting the wrong dragon.
We all understand and feel the effects of inflation, especially of late. But inflation has never been a real retirement problem before, when a retirement was expected to be short (just a few years) and the corrosive effects of inflation didn’t have the time they needed to make the issue relevant. This has changed dramatically.
Just think back to what you paid for a car 30 years ago? Or what you made and lived on back then! It is shocking to think about, and that is what is happening over the course of a modern retirement nowadays.
The ‘dragon’ that most retirees were concerned with fighting in the past (and still are) was/is ‘principal protection’. One needed to preserve their hard earned money in retirement and fix their income based on their principal. This is where the term ‘fixed income’ actually comes from.
One of the problems today is that a whole generation of retirees, who have been taught to worry about (and fight) the ‘principal protection’ dragon are in the wrong fight. The issue is no longer about protecting your principal (not losing what you have saved), it is about protecting your purchasing power. This is the dragon modern retirees need to fear.
If a retiree today fixes their income (and thus their principal) while the rising cost of living slowly eats away at their purchasing power, they will find out eventually (usually after it is too late) that they have been eaten by a dragon they didn’t even realize they were fighting. Today’s retirees need to be concerned about having investments that don’t fix their income or principal, but rather provide an income that will rise at least at the rate of inflation over time.
There is only one investment that has consistently accomplished this goal over long periods of time… Stocks. The thing that retirees have been taught to fear the most is actually the only thing around that can help them defeat the dragon they ought to be fighting. This paradigm shift is a hard one for retirees to swallow, and one that more planners need to be educating on.
Minimizing lifetime taxes.
A modern financial plan (and a true fiduciary financial planner) should be addressing every one of these tax time bombs within the context of your financial plan. If they are not, it may be time to find a new planner to work with. The right financial planner might not live in your town.
Love it or hate it, technology is advancing and is here to stay. The pandemic has certainly changed a lot about our world and one of the most profound changes has been the quick adoption of video (screen share) meetings utilizing tools like Zoom.
It used to be that most people would only seek out a financial planner (or professional of any sort) that lived and worked within their community. This made perfect sense before Zoom and it was normal to drive to their office and meet face to face from time to time. All that has changed.
Now, the planner that might be just right for you could live anywhere in the US (or the world for that matter) and you can easily meet with them to discuss your financial plan over video conferencing programs like Zoom or Google Meet. And as planners specialize more and more into niches, it is likely you would find the advisor that specializes in your situation somewhere outside your hometown. Maybe it is time to cast a wider net and search beyond your city to find the right retirement income planner for you?
Annuities are not what they used to be.
This is a product that has gotten a lot of bad rap over the years and, like the Roth IRA, is very misunderstood. Annuities were originally created to solve a problem, and they did just that. They provided lifetime income to people who wanted a pension style income in retirement. The problem was that they had some significant drawbacks in the early days (a long time ago).
Many people still believe that annuities are expensive and that you have to give up all control of your money to an insurance company (another ‘bad’ world to many people). And while that used to be true, it no longer is (in general) and like all products that have endured, they have evolved and gotten better over time.
Modern annuities are no longer expensive and do not require that you relinquish control of your money (or choice of investments). The insurance companies also no longer keep your money should you pass away prematurely (another false conception about annuities). These are two of the biggest advancements that have been made with these innovative retirement income products.
Because people are living (and retiring) for 30+ years now, having an income that is guaranteed and that you cannot outlive can be very beneficial. Newer annuities even have features that allow them to offer an income that can rise with the rising cost of goods retirees need every year.
Annuities (like any product) may not be right for everyone, but they are definitely worth learning about and considering within the context of a comprehensive retirement income plan. Having an open mind about these new innovative products may be in your best interest. And did you know that studies now show that people who have annuity income as part of their retirement plan have more fun in retirement and live about 2 years longer than those who don’t!
