Baby Boomers are reshaping the look of retirement. It is no longer seen as a time to let the clock run out on your life. Instead, retirees find time to embrace new hobbies and interests, travel, volunteer, and live a full and active life well after quitting the nine to five job. These changes impact how you save and plan for the retirement years ahead.
While there is no crystal ball to identify your exact timeline, it is important to take into account that you could have many active years in retirement.
Improvements in technology and medical field advancements, allow people to live longer healthier lives. These benefits require better financial preparedness at a time when seniors cannot rely on company pensions to pay the bulk of the expenses. To meet these new challenges, some choose to work longer while others ease into retirement through part-time transitional employment.
The truth is: The changing appearance of retirement means it is time to take a fresh look at how you plan for the next chapter of your life.
It Is Impossible to Know the Exact Amount You Will Need
A retirement plan creates a strategy focused on a higher probability of success, rather than a certain dollar amount for a certain number of years. You do not know long you will maintain your health, how the markets will perform, and many other unknown factors. Effective tactics will consider past trends and probable scenarios in the future to create a ballpark estimate of what you will need to fund retirement. Due to the unknowns, the plan must remain fluid during both the planning and distribution stages.
Rather than contributing a random amount each month to retirement accounts, set a final number you want to reach and then create a benchmark for monthly savings to reach the goal. Online calculators or financial advisors can help you decide how much you should contribute each paycheck to achieve your desired end goal. Then automate the process, so you follow through.
Lifespan Remains an Unknown
How long you will live and how long you will remain in good health are two of the biggest unknown factors to consider when planning for retirement. While the average lifespan for a man in the United States is 78.7 years old, the average 65-year-old man will live to 84.3.
The other challenge with life expectancies is that averages mean you have a 50% chance of living longer than the projected lifespan. To accommodate this, experts recommend saving enough to cover 30 years in retirement to reduce the probability of running out of money.
The advantages of compounding, combined with an employer match, can create a healthy nest egg to draw on after you stop working. The following is an example of savings growth based on earning $50,000 a year and contributing 6% to a 401K.
|Current 401 (k) balance
|Years to invest
|The annual rate of return
|Expected annual salary increase
|Percent to contribute
|Your 401 (k) contribution*
|$3,000.00 per year
|Your employer's 401 (k) match
|$1,500.00 per year
At a 50% employer match, up to a maximum of 6% of annual salary.
|The total you will contribute
|Total your employer will contribute
|Total at age 72
|Total without an employer match
The later you start funding retirement, the higher percentage of income you must contribute to save the same amount. Even with current debt balances, it is important to contribute consistently to retirement accounts.
Waiting Makes It Harder to Reach Your Goals
The longer you wait to begin retirement planning, the more money you must save. On a smaller scale, consider that if you save $100 a month for an annual vacation, you will acquire $1,200 by the end of the year, not including any account growth. If you wait until January to save for the same vacation in June, you only have six months to save, requiring you to set aside $200 per month. Add in decades of potential compounding, and there is a staggering savings rate difference. Waiting to save, requires you to rely more on actual contributions and less on account growth.
The power of compounding is one of the biggest advantages to starting early and saving over decades. The chart above illustrates the point. You would contribute a total of $126,000 over 42 years, yet your balance would rise to over a million dollars. The magic to achieving large account balances is not putting away 20% or more of your income for ten years, but contributing 10% for 20 years or more. The earlier you start, the more money you will have.
Social Security Will Not Produce Retirement Security
Social Security uses payments from the current workforce to pay retiree benefits. It is not a savings account earning interest during your working career. The program is vulnerable to an increasing workforce, rising wages, and other factors. Congress could make adjustments to the program, even after you begin receiving benefits. Current projections estimated Social Security payments would deplete by 2034.
Pensions are the second major funding vehicle for retirement and have largely disappeared from the private workforce. Today only 4% of private companies offer a pension plan, leaving the majority of the workforce to fund your retirement with personal savings.
Medicare Does Not Cover All Medical Costs
While Medicare provides health insurance for everyone over the age of 65, it offers limited coverage, averaging 80% of the total cost of covered care. Supplemental plans can help bridge the gap but still come with high out of pocket costs. In addition to premium payments, seniors have limited coverage for medications, and long-term care, and typically no coverage for medical needs such as hearing, vision, and dental care.
Retirement planning involves more than money. You must make decisions regarding the kind of life you want to live after leaving your job and begin to take stock of how you can live the final chapter of your life on your own terms.
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