The New Realities of Retirement
For years, many professionals were looking to the future with great anticipation, a chance to retire comfortably and enjoy the security that years of investing, as well as social security and pensions, would bring to their golden years.
Due to the economic downturn, a new retirement reality has fallen upon all generations and investors are starting to discover that they’re going to have to work longer and invest smarter in order to retire with a lifestyle that is similar to what they have been experiencing during their working years.
For many seniors, rather than enjoying time traveling or with hobbies, work is the new reality. After all, it’s not easy, and sometimes impossible, to maintain their current lifestyle with low interest rates, rising health care costs and an increased life expectancy. People are living longer, which means retirement funds must be spread out as income over a much longer period of time than many baby boomers had originally planned for. Due to this new reality, many boomers are finding themselves working far beyond the age of 65.
Additionally, the rate at which seniors are spending their retirement income must be adjusted to make that income last longer. Conventional wisdom was that seniors could spend 4% to 5% of their investment assets per year, but in this uncertain economy combined with increased life expectancy, many now believe that number should be reduced to 3%. Understandably people should err on the side of caution, but at Pathlight, we are comfortable with the 4% withdrawal rate, particularly if investors have a growth component to their portfolios.
This same reality is hitting younger workers, too. With the baby boomers retiring, a significant depletion of the social security “pot” is set to occur, meaning that those about to retire, or those just starting careers, will have to fend for themselves as far as retirement income goes.
For younger workers, the common wisdom has been to take on risk with their retirement funds as the investment horizon is much longer for younger workers and therefore, in theory, they can handle more risk. Due to the recent economic climate, that school of thought is being replaced. Today, consistency of returns over a long period is more important than capturing the moves by the most aggressive investments. Consistency allows you to stay with an investment, while volatility and risk of loss may cause you to abandon the investment without having a positive return. In addition, this puts more importance on the contributions to the plan (by far the most significant growth factor) than the way the funds are allocated.
Furthermore, the new retirement reality poses an uncertain future for younger workers who will not have a guarantee of a corporate pension or social security funding. Members of Generation X and Generation Y, as well as Millennials, will need to be creative and diligent with their investing program by turning to 401k and personal investments exclusively in order to fund their retirement plans.
The challenges of taking a lifetime of savings and converting it to a stream of income can be overwhelming. An increase in life expectancy and rising health care costs stretch your dollars even further. For a comprehensive plan to make sure you’re prepared to not just survive, but truly thrive, in your golden years, contact one of Pathlight Investors portfolio managers. They can give you a customized analysis of your retirement situation and make recommendations to help make your retirement vision your retirement reality!