In years gone by, there were three basic stages in life: childhood, working age, and retirement. As long as you were well educated during the first stage and worked hard throughout the second, the third stage pretty much took care of itself through a combination of Social Security benefits and employer-sponsored pensions. Today, however, all of that has changed and a comfortable retirement is anything but a foregone conclusion.
In this article, we’ll look at why things have changed, what the “new retirement” looks like for most Americans, and how seniors can still make the most of their retirement years today.
There are many factors involved, but two of the biggest are the dramatic increase in life expectancy and the shift from funded pensions (aka defined benefit plans) to personal retirement savings and investment vehicles like 401(k)s and IRAs (aka defined contribution plans).
On the surface, these are both positive changes:
“Life expectancy increased by nearly 10 years over the last half century -- from 69.9 years in 1959, to 78.9 years in 2016.” This was largely due to improved medical care and a general increase in the average American’s understanding of how to maintain their health. No one can argue that a 14 percent increase in lifespan is a bad thing.
“In 1980, about 40 percent of private sector pension contributions went to defined benefit plans; by the year 2000, almost 90 percent of such contributions went to personal accounts.” As the infamous Enron disaster brought to light, having our retirement funds invested solely in the stock of one company was inherently risky. So, the diversification and added control that comes with personal retirement accounts should have improved everyone’s financial situation heading into retirement.
Instead, these and related factors have had a decidedly negative impact on the overall financial wellbeing of older Americans:
“Despite the collective accumulated wealth of the aging population, according to the U.S. Census Bureau, nearly 10 percent of older adults over 65 years of age are in poverty, and many are without sufficient means to retire… Only 48 percent of households age 55 and older report having some amount of retirement savings. 23 percent report having a defined benefit plan, but no savings, while 29 percent report having neither a defined benefit plan nor savings.”
What went wrong?
Again, there are many other factors involved, but one basic reason these changes have led to such a difficult situation today is the fact that people’s understanding of and attitude toward their financial wellbeing hasn’t changed with the times. At least, not fast enough to avoid entering the traditional retirement years unprepared.
Millennials and younger generations are entering the workforce with little to no expectation of an employer-sponsored pension and zero confidence in the availability (or even existence) of Social Security benefits to help fund their eventual retirement. As a result, many are far more conscientious about saving for retirement than their parents or, really, any older generations have been.
By contrast, Generation X and Baby Boomers were largely caught off guard by these changes, even though the changes happened slowly over decades. As a result, many current American seniors (and many more who are less than two decades from retirement) find themselves ill-prepared for supporting themselves for the 15 or more years the traditional retirement period now lasts. And, current wage stagnation and caps on tax-deferred savings contributions mean that most won’t be able to save up enough in time, even if they’re still working now.
How can seniors today improve their financial wellness?
If you’re currently 62 years of age or older, and your financial situation allows for a comfortable and enjoyable retirement, you’re in the blessed minority. You shouldn’t need to stress about financial matters, but at the same time, it’s wise to remain cautious:
- Work with an accountant or financial planner to ensure that your income and/or investments are sufficient to account for inflation and a reasonable amount of unexpected medical or emergency expenses.
- Draw up a reasonable budget (if you haven’t already) that has you living well within your means. That way, you should be able to save for things like travel and recreation — what retirement is supposed to be about — without falling into expensive debt or putting your future finances in jeopardy.
- If you truly want to work, start a business, or make extra money in some other way, go ahead! No one is obligated to stop being productive just because they’ve lived a certain number of years. But, balance your level of new income with any benefits or tax advantages you’re currently relying on to make sure you’re not doing more harm than good.
- Be hyper-vigilant to protect yourself from investment scams and other criminal attempts to defraud you of your money. “Older adults are vulnerable to a number of financial threats, including fraud, identity theft and financial elder abuse.” Many of these scams originate online, so get help now if you’re not comfortable with your level of computer savvy.
If you’re 62 or older and you’re struggling to make ends meet, you’re not alone. According to AARP, “24 percent [of American seniors]... faced a higher risk of struggling to pay for basic needs, obtain credit and handle an unexpected expense of $2,000 or more.” Likewise, they note “trends showing that a larger share of older adults reaching age 60 carry mortgage and other debts and have limited or no retirement savings."
Don’t give up hope. It’s still possible to turn your financial situation around and get on a better footing.
- Work with an accountant or financial planner to review any and all assets or investments to make sure they’re working as hard for you as possible.
- Discover what benefits may be available to you at the federal, state, and local levels. The National Council on Aging is an excellent place to start. Take full advantage of options made available to boost your income and/or reduce your living expenses, and don’t let pride or embarrassment interfere. These programs are here to help you, and you’ve probably paid for them your entire life through your taxes.
- Set up a reasonable budget that eliminates unnecessary expenses and covers your needs with as much wiggle-room as possible within your income. Then, do your best to stick to that budget.
- If at all possible, take on a part-time job, start a business, or offer skilled services on a freelance basis. The more you can add to your income at this point, the better your situation will be now and in the future when working may be more difficult. Just make sure you understand how your work-related income impacts your Social Security or other benefits. That way, you can keep everything balanced so you’re bringing in and keeping the most money possible.
Finally, if you’re younger than 62, you’re probably preparing for your own retirement while also helping an older family member navigate these complex situations. The same principles above apply, no matter how old you are. And, the sooner you put them into action, the better your financial situation will be down the road. Help your older loved ones to do the same to whatever extent is possible.
Perhaps most importantly, no matter your age, remember this: while your retirement may not be what you once dreamed, living a long, healthy, and productive life is the definition of success. And that’s still within reach of most American seniors despite all the changes we’ve discussed. Make that your ultimate goal and your retirement can be a joy.