When we think about our future, we often start by looking to the past... a concept which is not new, especially in the economic and financial world. For example (1), looking back at the Roaring Twenties, it was a time of abundance and prosperity, built on wealth and credit to buy certain luxuries. This era was brought to a halt in 1933 when more than a quarter of the labor force was pushed out of a job and 5,000 banks went under. What did the nation learn? It brought on new regulations for banking, the stock market and other industries to avoid such a dramatic crash. Or consider the impact of the World Wide Web in the 90s, which brought on a shift in efficiency, profitability and how businesses gathered and used information. As a result, a New Economy emerged with strong growth, low unemployment and minimal inflation. Plus the Internet is a staple in all our lives today.
Although it’s intriguing to take a stroll down history lane, we can also apply similar logic when we think about retirement strategies and trends. Specifically, the Baby Boomer generation (born 1946 to 1964) is considered the “Trailblazers of the New Retirement.” Here are some fast facts on why they have claimed this title according to the Transamerica Center for Retirement Studies (2):
- 7 in 10 Baby Boomer workers either expect to or already are working past age 65 or do not plan to retire.
- 56% are focused on staying healthy.
- 40% are keeping their job skills up to date to help ensure they’ll be able to continue working.
- 42% envision a phased transition into retirement; however, only 29% indicate their employers offer flexible retirement transition arrangements.
- Baby Boomers have saved an estimated median $152,000 in household retirement accounts.
- 26% of Baby Boomers have a backup plan for retirement income if forced into retirement sooner than expected.
If some question marks are popping up from your head, you’re not alone. Another study indicates 20 million working Americans between ages 55-64 have no money in 401(k) retirement or pension accounts. The fallback and reliance on social security may not be enough when the time comes to retire.
- What can we learn? Take advantage of saving early and especially the time-bound benefits of compound interest. Even if you’re only able to put a small amount aside for retirement, it’s important to start this habit early when you join the workforce and keep disciplined over the years. This will give your money time to grow and add up so you feel equipped when you enter this age bracket (even if it seems so far away right now).
Furthermore, the retirement age is beginning to move up. Most current retirees retired at or before age 65. However, today’s workers anticipate retiring at a much later age than their predecessors. This decision is primarily tied to whether or not they have “enough money to do everything they want to do” in retirement. It’s important to note that unexpected life events may play a role in retirement age. In fact, 57% of those who retired earlier than expected did so because of health issues or to care for loved ones. Another 30% retired earlier than expected due to job loss or accepting early retirement initiatives (3).
- What can we learn? Preparing for retirement early is the key to avoid added pressure when retirement comes (whether expected or unexpected). In fact, one survey claims 71% of Millennials expect to keep working later in life and wish to maintain their desired quality of life. Understand your relevant life events and how that may impact your nest egg. By creating a retirement plan now, which prioritizes “what you want to do in retirement,” will help plan for your vision for the future. Whether this includes travel, paying for children or grandchildren’s education, giving back to charity or leaving an inheritance, you can ensure each category important to you is addressed before it may be too late.
There is a disconnect between social security and expected income. According to the NPH Foundation, 62% of Baby Boomers think social security will provide more than half of their income during retirement. However, it really only replaces about 40% of income – which is even less for higher-income earners (4). This expectation and reliance on social security can quickly move someone into poverty after retirement.
- What can we learn? The increasing number of Baby Boomers retiring has a direct impact on the Social Security program. Since this group makes up about 20% of the American population, it’s not an income source that should be fully relied on. This is just another reason to prioritize your 401(k) retirement savings and allow social security to potentially supplement it when the time comes to retire.
Planning for retirement is one of the key components to a confident and fulfilling future. We can learn from the Baby Boomers to see how retirement isn’t a right, it’s a privilege, and if we think we can rely on Social Security to carry us through our golden years, we’re in for a rude awakening. To avoid these retirement pitfalls, it’s imperative to set up a savings plan that fits you, your situation and your goals for the future. Don’t leave retirement up to chance--instead, plan for it to ensure it happens on your terms.