Retirement Realities – July 2013 Newsletter

We read every day that the average consumer is not adequately preparing for their eventual retirement.  Maybe that comment hits home when you read it or maybe you think they are talking about the guy down the street.  Whatever your reaction, it may be time to consider the realities of retirement and what you can do to protect your future.

In the days of Franklin Roosevelt, there was a philosophy called the “community society” where an American worker had a hypothetical three-legged stool to rest upon in retirement.  The three legs consisted of a government Social Security benefit, an employer pension benefit, and an employee’s personal savings.  These three legs were viewed as entirely adequate to fund a retiree’s remaining years, which incidentally lasted only 5-10 years.  As an aside, the third leg, the employee’s personal savings, was really viewed as “gravy” for the extras that might be desired in retirement.

Over the last fifty years, times certainly have changed.  Consider the following items which have thrown this philosophy on its ear.

  • Life expectancy has increased dramatically.  The chart below illustrates that for a 65 year old couple there is a 45% chance of one spouse living to age 90.
life expectancy chart

Source: Society of Actuaries, “Key Findings and Issues, Longevity,” 2011 Risks and Process of Retirement Survey Report, June 2012

  • As the boomer population begins retiring, the number of active workers (and therefore contributors to the Social Security system) is declining, thereby making it more difficult for the US government to keep the system fully funded for increased numbers of retirees, as well as the associated increased retiree lifespans.
  • Employees are much more mobile today and typically change jobs every 4-5 years.  Therefore they are not staying with companies long enough to earn pension plan benefits.  Additionally, the EBRI (Employee Benefits Research Institute) states that only 7% of private employers even offer pension plans to their employees.
  • Personal savings rates are low.  The chart below shows the savings trends over time and illustrates the fact that consumers are doing just what their name states, consuming, rather than saving for their future.
Savings Rates Chart

Source: J.P. Morgan Asset Management, The Bureau of Economic Analysis. 

  • The sheer number of retirees is increasing at alarming rates.  Table 3 shows that by 2030, the number of Americans aged 65 and older is expected to top 20% of the total population.  This puts additional strain on governmental programs and will likely force changes to eligibility requirements going forward.

Table 3.  Percent Distribution of the Projected Population by Selected Age Groups and Sex for the U. S.

Both sexes2015202020252030
65 Years and older14.84%16.76%18.78%20.30%

Table 3.  (NP2012-T3); Source: U.S. Census Bureau, Population Division; Release Date: December 2012

Given all the changes that have taken place since this “community society” concept came into being, it is no wonder that we are seeing an increasing trend toward a new philosophy called the “ownership society”.  As might be evident from the name, this philosophy puts the ownership for a secure retirement squarely on the consumer’s shoulders to ensure their own “retirement stool” is steady and solid.  The employee’s savings piece is becoming the primary component in supporting consumers during retirement.

So how does the consumer make appropriate choices for protecting and securing their own retirement?

  • Start saving early.  The chart below shows the benefits of beginning to save early in life, due to the compounding effects over time.

Effects of compounding chart

The above example is for illustrative purposes only and not indicative of any investment. Account value in this example assumes a 7% annual return. Source: J.P. Morgan Asset Management

  • Live below your means.  Notice I didn’t say, live within your means.  If statistics are representative of your situation, you can expect to live in retirement for up to 35 years.  Assuming a long life, it is likely to require substantial savings each year to accumulate and grow enough to provide for 35 years of retirement expenses.   Therefore, you need to take advantage of every opportunity to save during your working years.  This doesn’t mean that you should live like a pauper in order to secure your retirement.  This is like dieting; it doesn’t work to deny yourself everything, or you will fall off the wagon, overindulge, and end up even farther behind.  It just means that when you get a raise at work, don’t automatically increase your standard of living by that amount.  Instead, look at a raise as an opportunity to increase your automatic savings to help your future picture.
  • Carefully consider what things are most important to you and your family.  Most of us are not in a position to have everything we desire, therefore we need to make choices in order to stay within our spending parameters.  It is a good thing for your children to see you choose not to purchase one thing in order to save for another.  Children learn much more by what you do than by what you say.  Naturally, as you move through your family’s stages of life, your savings patterns will have to change temporarily, but if you plan ahead for these stages, the first house or the impending college expenses won’t ultimately derail your retirement readiness.
  • Take advantage of your employer provided retirement plans.  Understand that in most cases, employers match a percentage of your contributions and when you choose not to contribute, you are walking away from free money for your future.
  • Understand the effects of inflation over long periods of time.  Although inflation is currently low, historic inflation rates have averaged 3.4%.  What does this mean to your future?  Does anyone remember bread for $.25 or gasoline for $.41?  Now think about what those items cost today.  This is the effect of inflation on the regular expenses you will encounter in retirement.  Therefore, your savings need to be even greater and need to be invested in such a way that they can stay ahead of the inflationary effects over a long period of time.
  • Protect yourself from the risks that you may face.  One of the biggest risks to workers today is the risk of not being able to earn a living.  This may be the result of a disability, the loss of a job, or other reasons.  A comprehensive financial plan can help to examine all the risks to your future and help to ensure that you are properly protected from these risks.
  • Plan on living a long, long life.  Medical advances are keeping people alive in situations that only a decade ago would have been death sentences.  If you want an estimate of how long you might live, based on some interesting factors, visit www.livingto100.com and complete their questionnaire.  It is surprising to consider all the components that factor into the calculation and could have an effect on the length of your life.

Retirement readiness is a complex topic.  Each person’s situation is unique and therefore warrants careful evaluation to determine the best path considering goals, desires and the particulars of your financial picture.  As a member of the “ownership society”, you need to accept responsibility for your own retirement future.  Engage with an experienced Financial Advisor who can assist you with coordinating all the components of your financial life to point you in the right direction for a more secure future.  With the potential for a long life ahead, it is critical to prepare and plan so it can be a life well lived.

If you’d like to learn more or schedule a meeting with one of Clearview’s NAPFA Registered Financial Advisors, click here.