This is Not Your Father’s Retirement

In 1988, when most Baby Boomers were focused on starting families and advancing their careers, Oldsmobile came out with the ad slogan, “This is not your father’s Oldsmobile.” Thirty years later, this same generation is facing a retirement that will probably look a lot different than their parents’. The generation that was once ridiculed for driving outdated Oldsmobile Cutlasses typically enjoyed more stability when they retired. They were more likely to retire at 65 and generate most of the income they needed from a pension plan and Social Security.  This may not be the case for their children. Here are some of the new challenges that retirees face:

 

Longer Retirements- The good news is that we are living longer lives. The average life expectancy has been increasing over the past several decades (For women it’s 81.2 years and men it’s 76.3 years).[1] For those age 65 today, the average life expectancy continues to increase. The downside to living longer lives is the increased potential of outliving our money. With fewer people having defined benefits (i.e., pensions), it’s crucial to have a strong investment plan with a conservative spending policy. This “longevity” risk that retirees face is causing more Baby Boomers to remain in the workforce.

 

Social (In)Security- The retirement of Baby Boomers has led to a demographic shift in our workforce and the ratio of workers to beneficiaries is declining[2]. This trend is likely to continue. The Social Security Administration projects that the trust fund that pays retirees may not be able to meet its obligations by 2034. There have been several proposals by Congress to fix the problem but there is uncertainty around who will carry the burden of reform[3]. Changes to retirement age and payroll taxes would impact the existing workforce, while reducing benefits to above-average earners and reductions to cost of living increases would impact current retirees.

 

Losing Purchasing Power- Although inflation has been manageable over the last several decades, it can be particularly damaging to retirees when you consider the impact it has on purchasing power, the value of our money in terms of purchasing goods and services, over long periods of time. Keeping most of your money in fixed investments may seem prudent, but given the low interest rate environment, investments with the potential for capital appreciation are necessary if we are to stay ahead of inflation.

 

Rising Health Care Costs- As health care costs continue to outpace inflation, fewer retirees have employer or union sponsored health benefits. According to Fidelity Investments[4], an average retired couple age 65 in 2018 may need approximately $280,000 saved (after tax) to cover health care costs in retirement. These costs need to be factored in to a retirement plan and for those still working who are in a high deductible plan, a health savings account (HSA) could be a valuable savings vehicle.

 

Growing Need for Long-Term Care- According to the U.S. Department of Health and Human Services, slightly more than half (52%) of individuals turning age 65 will have a high need for long term care over their lifetime[5]. So, who is paying the bill? In 2014, Medicaid and Medicare accounted for 63% of all long-term care spending[6]. As more retirees are faced with these costs our public programs could face challenges in funding quality care. When possible, a plan to fund these potential costs out of pocket or through insurance should be considered.

 

Regardless of where you are in the financial planning process, working with a professional can help you make the most of your days in retirement. The Oldsmobile slogan may have been short lived, but these challenges are not going away any time soon.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

 

[1] Centers for Disease Control and Prevention, “Mortality in the United States, 2015,” December 2016

[2] Social Security Administration, Fast Facts & Figures About Social Security, 2016

[3] Center for Retirement Research at Boston College, Social Security’s Financial Outlook: The 2017 Update in Perspective, 2017

[4] Fidelity Investments, How to Plan for Rising Health Care Costs, 2018

[5] National Association of Insurance Commissioners, The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations, 2016

[6] The Centers for Medicare & Medicaid Services, National Health Expenditures Survey, 2014