In our last article, we talked about how the increase in life expectancy presents a significant financial challenge for most retirees. In simple terms, the longer we expect to live, the more money it will cost to fund our retirement. The evidence suggests that most Americans are not are prepared to meet this challenge.
Governments and businesses that have had decades to prepare for this shift in demographic aging have also been slow to adapt. Statistics show that 10,000 baby boomers reach retirement age every day and will be living longer in retirement than any prior generation. Important national programs such as Social Security and Medicare which form a critical safety net even for affluent households are financially unsustainable without substantive reforms. Those changes, regardless of whether they take the form of tax increases, delayed eligibility or some other modification, will result in a net reduction in benefits. Households will have no choice but to make up the difference.
Longer retirements also mean greater pension and retiree health care liabilities for public (i.e. state and local governments) employers and for the dwindling number of private employers who continue to sponsor such plans. Many of these pension plans are already significantly under-funded and will be unable to meet their commitments to retirees without enormous infusions of cash. Sensible employees would be encouraged to save more while working and retirees to save some of their pension check once they leave the job, in the event that these cash infusions do not materialize.
You can probably guess where this is going: increasingly, the responsibility for insuring our retirement security, and financial independence will fall squarely upon each of us. It has become clear to policymakers and retirement practitioners that decisions regarding when to retire and when to collect Social Security benefits are two of the most important in determining the well-being of retirees. Evidence collected from the SOA, however, suggests that these two decisions are neither well-investigated nor wisely implemented by most households resulting in negative outcomes that could have been avoided.
Working longer improves the odds of enjoying a successful retirement. The additional years of wage income allows individuals to build larger 401(k) balances, maintain employer health insurance coverage, accumulate additional Social Security earnings, and shorten the time they will draw down their retirement assets.
Social Security remains the primary source of retirement income for most households including the affluent. Most retirement plans would be derailed without these benefits. Surprisingly, little consideration is given to delaying benefits or employing other coordinated claiming strategies despite the fact that these can add tens of thousands of dollars to retirement income. Instead, most people opt to collect benefits at the earliest possible age.
Retirement continues to be the most important priority and the biggest financial liability that we face. Planning for it is a multi-decade process that involves saving and investing throughout our working careers and then spending with confidence during retirement. Ultimately it is up to each of us to ensure that the blessing of a long and healthy life is accompanied by prosperity.
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions. John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com