Today’s retirees are changing the face of what retirement looks like. Being more active and living longer than any previous generation, baby boomers have been reshaping the world and every stage of life. Due to the large numbers attention is gained for both successes and failures. It is estimated that 10,000 boomers are reaching the age of retirement every day for the next 10+ years. What happens to baby boomers will impact the economy as a whole due to the vastness of these numbers.
As a result, financial shortfalls become amplified creating additional challenges or today’s retirees. The Social Security Administration, considers full retirement to be the age of 66 or 67, depending on the year you were born. This is the age where 100% of anticipated social security retirement benefits will be paid out. Unfortunately, millions of retirees are claiming early benefits at the age of 62, even though financially they have not saved enough for a secure retirement. Layoffs and health related issues are the primary reasons for early filings, even though it results in reduced payments of approximately 75% of full retirement benefits.
Retirement Structures Have Changed
Pensions and Social Security were all that was needed for previous generations to live successfully in retirement. It was common for employees to begin and end their career with the same employer. This led to a great deal of financial security during retirement years. In the last few decades the retirement structure has changed from a defined benefit plan, such as a pension, to a defined contribution plan, like 401Ks.
Employers prefer 401Ks because they are less expensive to administer, cost less for the company, and do not require the long-term payouts that pensions do. It ultimately shifts the liability from the employer to the employee, and has resulted in significant changes on how we view retirement. It is no longer the employer’s job to take care of employees for life. It is the workers job to have the discipline to save enough to fund your own retirement needs.
The result in this mid-career adjustment is that millions of baby boomers are now relying on Social Security payments for the bulk of their retirement income, impact the standard of living for seniors.
Private sector jobs that offer pensions have dropped to an all-time low of approximately 20%. Pensions created a more secure retirement picture because they are funded by the employer, and offer guaranteed income for the employee’s lifetime, and often the life of a spouse. Employees were not expected to fund their own retirement in order to obtain financial security.
Today, around 50% of companies offer access to 401Ks or other employer response employer-sponsored retirement plans. Employer matches, however, do not make up for the loss of pensions. 401Ks were introduced by major corporations like Johnson and Johnson in 1982, midway through baby boomer careers.
IRA accounts have also become popular in the last 20 years, but only provide the ability to contribute a maximum of $5,500 per year. Another challenge with 401Ks and IRAs, is that the employees, with limited investment knowledge, must choose appropriate mutual funds that will grow fast enough to pay for retirement. Automatic enrollments, which are starting to become popular, are too little, too late for most baby boomers.
Increased Life Expectancy and Family Dynamics
Life expectancy for those reaching the age of 65 is around 20 years. When social security first began workers were expected to live for a few years, not a few decades. This means you have a working career of 40 to 45 years and must save for another 20 years in retirement. To achieve this feat, you must set aside larger amounts of money, as a percentage of income, than any previous generation.
Rapid increases in technology and improved healthcare could extend life expectancy even further. Cures and new treatments for disease not only mean seniors are living longer, it also means that healthcare costs are rising significantly faster than inflation, creating a delicate balance when it comes to paying for treatments and illnesses. Increased life expectancy has also created a growing market for senior living, nursing homes and other senior care options, that must be funding through baby boomer savings.
Seniors who are short of retirement funds could end up relying on adult children to make up for financial gaps, which could leave the children short when preparing for their own retirements. Family dynamics have changed in the last half century. Both parents often work outside the home and children live further away from parents, as transportation options improve. These dynamics impact the amount of help provided by family members versus paid professionals, and can play a big role in finances for all family members involved.
Statistically, a 65-year-old couple has a 73% chance that one will live to be at least 85. The odds of one living to be 90 are 47%. For those retiring at 62, this is nearly 30 years of funding that must be met.
These changes in the retirement reality is likely to lead to long-term challenges for the children, which are often referred to as the sandwich generation. They may be left with the responsibility of caring for their parents, as well as their children, making it difficult to achieve success during their own retirement.
Easy Money Through Credit
With each passing year the ability to become overextended seems to be easier. Companies are anxious to lend because profit margins are high. Cheap money in the form of low interest rates have encouraged homeowners to take on larger mortgages to buy more expensive homes. You are encouraged to refinance and take home equity out in cash, giving you more spending ability at the expense of a growing asset. On a macro scale, cheap money grows the economy faster because consumers overspend, even when wages are stagnant.
In today’s environment, approximately 30% of those in retirement are still paying on a mortgage and for those over the age of 75, the number is still over 20%. Credit card and student loan debt are factors in many senior households as credit balances continue to increase, and more seniors are paying student loan debt.
Social and economic changes are changing the face of retirement. Many seniors are struggling financially and working well into retirement years, if physically able. We continue to look at short-term needs and short-term consequences, which is creating a long term impact on retirement living. The economic influence of these changes will likely be felt for decades to come.