Retirement should be a time to enjoy the fruits of decades of working and saving, right? Part of enjoying the retirement years is having the peace of mind that comes from understanding some aspects of retirement that many people don’t consider. Understanding life expectancy, managing retirement assets with respect to volatility, and maintaining purchasing power can help stretch retirees’ savings and provide a more comfortable situation in the “golden years”.
Life expectancy, the average number of years that a person can expect to live, has changed throughout history. For example, the average life expectancy for someone in the United States in 1921 was about 60 years of age and in 2021, the life expectancy has jumped to about 78 years of age. That’s great, right? We all probably want to live longer, and advances in medical care, healthier lifestyles, and a less dangerous environment overall have made the prospect of a longer life a reality. But what does a retiree need to do to pay for the living expenses in these “extra” years? With increased life expectancy comes the responsibility to properly plan for not only living expenses such as food, housing, energy, and transportation, but also increased health care costs. According to a recent survey by PWC, 73 percent of Millennials, 70 percent of Generation X, and 61 percent of Baby Boomers think health care costs will have an effect on their retirement. Retirees must consider their increased life expectancy when planning for the future.
About 80.4 million out of 139.6 million working Americans have access to an employer-sponsored defined contribution plan. That’s about two-thirds of the workers in America who have access to saving and growing their retirement funds, which can be seen as a powerful number. The other side to so many Americans having a defined contribution plan as a main savings tool is that in a 401(k) plan, the account holder or plan participant selects their own investments and is responsible for managing their asset allocation in many cases. Given the volatility of the stock markets and underlying investments in these defined contribution plans, retirees can be in for a surprise if their investments and risk tolerance are not correctly synched. To help prevent losses related to market volatility, retirees must feel comfortable in taking steps to periodically check their risk tolerance and underlying funds choices within their retirement accounts, and make changes when appropriate.
A big concern for many in retirement is making sure that the money that they’ve saved, grown, and now depend on will continue to meet their purchasing demands. Purchasing power is a legitimate concern and with the rapid increase of 3.4% inflation since late January 2021 to an expected year end rate of 5.3%, those in retirement should pay attention to their investments and how they are (hopefully) outpacing inflation. Less than a year ago, the Federal Reserve was expecting inflation at 1.8%, so higher inflation and potentially reduced purchasing power are relatively new concepts to most in retirement. In keeping with managing volatility and double checking their investments as they relate to risk tolerance, retired persons should periodically check rates of return to make sure that their funds are growing at an acceptable rate and can keep up with rising inflation.
As we can see, several factors should be considered as you chart a safe course through retirement. From the familiar topic of life expectancy to relatively new concerns of managing market volatility and protecting purchasing power, retirees have several items to look over as they plan. Join us for our October FIT4Learning webinar on October 28 to learn more about these and other aspects of retirement readiness.
Financial Fitness Consultant