Based on a 2017 Retirement Confidence Survey by EBRI, only 18% of American workers feel very confident that they will have enough money to live comfortably in retirement. With this in mind, there are numerous demographic and social changes, such as greater longevity and improvements to technology, that are fundamentally changing the ways people live after they complete their primary careers. As a result, many retirement assumptions of the past no longer apply.
All this change has deemed traditional retirement planning tools and resources inadequate for a growing number of people. With a front-row seat to today’s retirement challenge, many financial advisors are trying to serve clients’ evolving needs, but are stuck with old formulas, strategies, and solutions.
While many debate what the term retirement will mean in the future, the reality of the “new retirement” in our view runs counter to many of the old common assumptions that have been used in planning for the future. Here are some of the new realities that few may consider:
Retirees Will Live Longer Than They Think: There are many old rules of thumb, such as the 4% rule, that suggests how a retiree can safely withdraw 4% of their nest egg each year. This was based on the assumption that retirement would only last a decade or two.
Women Rule The Retirement “Roost”: The financial advisory industry has been well known for disregarding women, possibly because most advisors are men, or because advisors historically have focused on only investing, which research shows tends to engage men more than women. Regardless of reason, failing to involve people of both genders can hurt both advisors and especially their clients.
Many Retirees Live Alone: While a lot of advertisements depict couples and families in retirement, the reality may suggest additional information. More than 30% of retirees live alone and this may be higher with age. Retirement plans based on assumptions that retirees will live in a two-person household or cared for by their children are outdated and puts the retiree at risk.
Older Clients Embrace Technology: There is a false claim that older aged retirees are uncomfortable with tech and prefer to communicate via phone or in person. This is based on older generations and schools of thought. Today’s retiree audience is much more tech savvy than ever before, and this trend only continues to increase.
While these and other new realities emerge, so do potentially new stages of retirement. In the past, many assume there are pre-career (education), career and post-career (retirement). Research from MIT's AgeLab suggests that the life stage we call “retirement” may actually comprise of four distinct stages, each with their own set of challenges and opportunities.
Managing free time and ambiguity
Managing big decisions
Managing for life transition
Many pre-retirees may often feel they are on the right track, but the implications of not having the right plan in place (or utilizing the wrong retirement assumptions) can be devastating. For example, the following chart provides the probability of success for various scenarios (assuming static portfolio withdrawals) that illustrate where problems can arise when looking to maintain sustainable lifetime income.
Here are some concluding thoughts that may help you plan for the new retirement landscape:
DON’T DE-RISK YOUR PORTFOLIO'S EQUITY EXPOSURE PREMATURELY
BOTH SPOUSES SHOULD ENGAGE EARLY
RETHINK THE TIMING OF STARTING INCOME
People need new frameworks to help them meet their needs in retirement. Those who plan or seek additional advice around these will be well positioned to capture the opportunities and manage the risks given these new realities.
We appreciate our relationship with you and as always we are here to help.