Article
Redefining Retirement in the 21st Century
When a man retires and time is no longer a matter of urgent
importance, his colleagues generally present him with a watch.
-- R.C. Sherriff
The days may be over when a gold watch is a somewhat ironic and
less-than-useful gift for a retiree. If the experts are on target,
retirement in the next century will scarcely resemble the
conventional image of lazy days spent on cruise ships and golf
courses. You might plan to open a business of your own. Or perhaps
you'll return to school for that graduate degree you never had the
chance to complete. Of course, you'll probably still find time to
sit back and put your feet up.
Creating a New Life Cycle
At the turn of the 20th century, the average life expectancy was
47 years. Today, the average American newborn can look forward to
76.4 years of life. What's more, the average life expectancy for
today's 65-year-old has increased to 83.4, according to the Center
for Disease Control's latest mortality statistics.1
What's behind this trend? Some causes are obvious, such as
improved health care, both early on in the form of preventive
medicine and during the later years of life. Medical advances,
including hypertension drugs and hip replacements, allow older
Americans to remain active. Healthier lifestyles are also a
contributing factor.
"People are treating their bodies with greater respect," said
Dr. Sanford Finkel of the Buehler Center on Aging at Northwestern
University. "They're giving up smoking, learning to eat right, and
exercising regularly. Inevitably, these trends lead to healthier,
longer, more productive lives."
The result is a new way of thinking about age. In her
best-selling book, New Passages, Gail Sheehy argues that
the "mid-life passage" generally thought to take place at age 40
now occurs a decade later. The period between ages 45 and 65 is no
longer middle and old age, according to Sheehy, but a "second
adulthood." Psychologist Ken Dychtwald, chief executive officer of
Age Wave Inc., a California-based consulting firm, also sees new
lines being drawn. Using his model, ages 25 to 40 represent young
adulthood, while ages 40 to 60 comprise a new stage known as
"middlescence." Next comes late adulthood (60 to 80), followed by
old age (80 to 100), and very old age (100+).
But perhaps more important than the categories is the effect
that longer, healthier lives may have on the traditional life cycle
of education, work, and retirement. It will be replaced by a less
linear cycle, according to Dychtwald, who predicts short-term
retirements, followed by any combination of career shifts, part- or
flex-time work, entrepreneurial endeavors, and continuing education
peppered with occasional "mini-retirements."
Plan for the New Retirement
So what does this redefined retirement mean to you? There is no
one answer. In the coming decades, "retirement" will mean something
different to each of us. Regardless of your definition, you'll need
to design a financial plan suited to your specific vision of the
future.
Retirement Income -- A good starting point
might be to examine your sources of retirement income. If you pay
attention to the financial press, you've probably come across at
least a few commentators who speak in gloom-and-doom terms about
the future for American retirees, decrying a lack of savings and
warning of the imminent growth of the elderly population.
True, there is widespread concern about at least one traditional
source of income for retirees -- Social Security. Under current
conditions, Social Security funds could fall short of needs by
2034, according to the Social Security Administration. But the
reality is that Social Security was intended only to supplement
other sources of retirement income. In fact, Social Security
benefits account for only about a third of the aggregate income of
today's retirees, according to the Social Security
Administration.
Even pension plans, once considered a staple of retirement
income, account for only a small share of the retirement-income
pie. In recent years, employers have been moving from traditional
defined benefit plans based on salary and years of service to
defined contribution plans, such as 401(k) plans, funded primarily
by the employee.
This shift makes it even more important for individuals to
understand their goals and have a well-thought-out financial plan
that focuses on the key sources of retirement income: personal
savings and investments. Given the potential duration and changing
nature of retirement, you may want to seek the assistance of a
professional financial planner who can help you assess your needs
and develop appropriate investment strategies.
As you move through the various stages of the new retirement,
perhaps working at some times and resting at others, your plan may
require adjustments along the way. A financial professional can
help you monitor your plan and make changes when necessary. Among
the factors you'll need to consider:
Time -- You can project periods of retirement,
reeducation, and full employment. Then concentrate on a plan to
fund each of the separate periods. The number of years until you
retire will influence the types of investments you include in your
portfolio. If retirement is a short-term goal, investments that
provide liquidity and help preserve your principal may be most
suitable. On the other hand, if retirement is many years away, you
may be able to include more aggressive investments in your
portfolio. You will also need to keep in mind the number of years
you may spend in retirement. Thirty years of retirement could soon
be commonplace, requiring a larger nest egg than in the past.
Inflation -- Consider this: An automobile with
a price tag of $30,000 today will cost over $40,000 in just 10
years, given an inflation rate of just 3%. While lower risk
fixed-income and money market investments2 may play an
important role in your investment portfolio, if used alone, they
may leave you susceptible to the erosive effects of inflation. To
help your portfolio keep pace with inflation, you may need to
maintain some growth-oriented investments. Over the long-term,
stocks have offered the potential for returns superior to those of
other major asset classes, such as bonds or cash alternative
investments.3 But also keep in mind that stocks
generally involve greater short-term volatility.
Taxes -- Even after you retire, taxes will
remain an important factor in your overall financial plan. If you
return to work or open a business, for example, your tax bracket
could change. In addition, should you move from one state to
another, state or local taxes could affect your bottom line.
Investments that offer potential tax advantages, such as annuities
and tax-free mutual funds, may be effective tools for meeting your
retirement goals. Tax deferral offered by 401(k) plans, and IRAs
may also help your retirement savings grow.
Prepare Today for the Retirement of Tomorrow
To ensure that retirement lives up to your expectations, begin
establishing your plan as early as possible, and consider
consulting a professional.
1Source: Centers for Disease Control and Prevention, Mortality in the United States, 2021, NCHS Data Brief No. 456, December 2022.
2An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
3Past performance is no guarantee of future results. Cash alternative investments are short-term securities that can be readily converted to cash, such as U.S. Treasury bills. Note that cash alternative investments may not be federally guaranteed or insured and that is possible to lose money by investing in cash alternatives. Returns on cash alternative investments may not keep pace with inflation, so you could lose purchasing power.