Future Retirees Face New Challenges

Preparing for retirement is more complex than it used to be for obvious and not-so-obvious reasons. The most obvious is longer lifespans. Thanks to improved medical care, a person retiring today in their mid-60s may need their savings to last 30 years. The list of less-obvious challenges includes:

Less support from employers. More companies have replaced their pension plans with defined contribution plans – putting added responsibility on the employee. The rise of gig workers and entrepreneurs leaves many without access to an employer-sponsored plan.

Shrinking Social Security. Social Security’s annual cost of living adjustment (COLA) averaged 7.7 percent from 1975 to 1984 – a rate that was higher than inflation. In contrast, COLAs for the last nine years ranged from 0.0 percent to 2.8 percent.1 COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which many note doesn’t adequately reflect the growth of some of the more costly expenses seniors encounter, such as health care, property taxes, home repairs, and homeowners insurance.

For example, the Social Security COLA for 2020 was 1.6 percent even though health insurance premiums were expected to go up by 5.6 percent in 2020.2 And Medicare premiums often increase faster than Social Security. As a result, part or all of a year’s COLA may be consumed paying for a retiree’s premium increase.  

Rising health care costs. It’s no secret health care costs have risen drastically in recent years. And the later years in life often account for the highest expenditures. According to the Fidelity Retiree Health Care Cost Estimate, an average retired, 65-year-old couple in 2020 may need $295,000 (after tax) to cover health care expenses in retirement.

Low inflation. While low inflation rates sound positive for individuals on fixed incomes, they also provide low earnings on money in savings and conservative investments like bonds and CDs. Purchasing a fixed annuity or bond (except for a Treasury Inflation Protected Security) while inflation is low may result in losing value if inflation rises. Retirees may need to take on some risk to increase earnings.

Planning for and managing retirement is complicated in every economic environment. Whether your retirement is imminent or in the distant future, give us a call. We’d be happy to help you create a personalized plan designed to meet your needs.