Bringing Retirement Planning into the 21st Century

Retirement planning today looks much different than it did several decades ago. Changes in the way people live and work have resulted in the need for new, updated advice and methods. Below are several of the factors today’s financial planners and wealth managers are considering when creating retirement plans for their clients.

Planning for Longer Life Spans

Over the past 60 years, life expectancy in the U.S. has increased by more than a decade. In the 1960s, most individuals could expect to live around five years after reaching retirement age.

Today, individuals could easily live several decades after earning their last paycheck. This means that retirement income must last longer than ever before.

To ensure that their clients can outlive their retirement funds, retirement planning professionals advise several protective steps.

Firstly, part-time or flexible work should be factored into long-term retirement planning. While individuals may not have the interest or ability to take on full-time hours, earning a small income can bolster retirement savings and investments.

Additionally, retirees should calculate a withdrawal rate that takes into account a longer post-retirement life span. The popular 4% rule is not suitable during economic downturns.

As recessions occur on average every three to four years, retirees must incorporate these risks into their long-term financial plans. Retirement planners advise diversifying income streams amongst equity investments and fixed distributions.

Likewise, older retirees should retain a portion of their investments in aggressive portfolios in order to counter rising inflation rates. Algorithm-based portfolio managers known as robo advisors can automatically adjust a retiree’s investment plan depending on the economic environment. Since these services are automated, robo advisors are more affordable than actively managed funds.

Changing Forms of Retirement Income

When Social Security was introduced in the 1930s, a secure retirement was predicated on the “three-legged stool” concept. Retirees could anticipate an income from Social Security, company pensions, and a personal nest egg.

Today, most company pensions have been phased out for individual retirement plans, such as 401(k)s and Individual retirement accounts (IRAs). Since these accounts are offered by employers, they are not accessible to everyone. More than 40% of Americans nearing retirement do not have a personal retirement account.

Many retirees are also behind on retirement savings. A sizable percentage of Americans in all income brackets live paycheck to paycheck, which affects savings rates. A 2019 report by the Federal Reserve found that a quarter of Americans had no retirement savings.

Today’s three-legged stool consists of pre- and post-tax retirement accounts. Employer-sponsored plans like the 401(k) are funded with pre-tax income. The IRS limits how much employees can contribute yearly, although individuals over 50 have a slightly higher allowance. Those who hit their contribution limit can open post-tax retirement accounts such as after-tax IRAs. Post-tax income can also be invested in exchange-traded funds or mutual funds.

Financial planners help their clients identify all possible avenues for long-term income generation.

Increasing Medical and Living Costs

Increasing life spans have also contributed to rising medical costs. Financial services firm Fidelity estimates that a retired married couple may spend more than $300,000 in healthcare costs.

The need for long-term care is a major contributor to increased medical costs. 7 out of 10 older Americans will require some type of long-term care. A quarter of retirees will need long-term care for at least two years.

Residential long-term care or in-home assistance can cost thousands of dollars per month.  Retirees must factor this cost into their financial plans. Some retirement planners advise their clients to purchase a long-term care insurance policy to cover care-related expenses.

Inflation and rising living costs are also impacting retirement planning. Since 2021, the price of food, gas, housing, and healthcare have increased considerably. Individuals nearing retirement should implement inflation hedging strategies, such as downsizing their living costs, paying off debts, and reexamining their investment portfolios.

Automating Financial Planning Services

With all of these complex factors affecting retirement, financial advisors are incorporating the latest technologies into their services. For example, retirement planning software can monitor a client’s assets and liabilities and automatically offer suggestions to ensure their financial goals are on track.

Automated systems such as chatbots and adjustable retirement models have also made the industry more responsive to client needs. Retirees can get information 24 hours a day from chatbots programmed to answer the most frequently asked questions.

Virtual retirement savings projection models can generate a five, 10, or 20-year outlook based on the client’s current assets and estimated contributions. Most complex models can also consider best and worst-case economic scenarios.