More people are facing a new reality when it comes to their vision of how their retirement years will play out. Forbes contributor Peter Cohan wrote an article listing six reasons why the traditional retirement “….fairy tale has become a joke.”
Many of the items on the list feel like they out of our hands, but certainly financial planners can advise their clients on the areas we can control to help overcome these obstacles.
Six Reasons You’ll Never Retire
By Peter Cohan
1) “Corporate pension slashed”
How many retirees can expect to receive a fixed monthly pension benefit from their employers when they retire? Not many. The percentage of workers that can expect a fixed monthly income in retirement is dropping rapidly as companies cut costs and face less pressure to offer defined benefit plans. “A 2010 survey by consulting firm, Towers Watson, found that between 1998 and 2010, the proportion of Fortune 100 companies offering DB plans fell from 67 percent to 17 percent while DC plans rose from 10 percent to 58 percent.” Companies have moved away from defined benefit pensions and moved to defined contribution plans instead. Defined contribution plans take investment and longevity risks from companies shoulders and place that heavy burden onto their employees. This calls out a larger need for help from financial advisors. Advisors can help workers with strategies to manage their defined contribution benefits and make efficient investment choices.
2) “Dropping income”
Increasing income is a great way to improve a person’s overall financial health and ability to save for retirement, but the idea of increasing income is more like an enjoyable daydream to the average American after facing a decade of income declining. “September 2011 Census Bureau report revealed that a typical U.S. family got poorer during the decade between 2000 and 2010 — the first decade-long income decline in at least a half-century.” When faced with falling income, financial planners can help clients balance the scale by taking a hard look at expenses and help figure out what can and needs to be cut from their budget.
3) “Higher childcare expenses due to rise in dual working couples”
Even though average family income has been on the decline for the past ten years, the number of dual income families is rising. “According to the Census Bureau, between 1950 and 2008, the proportion of families with a man as the sole earner plummeted from 63.4 percent to 16.9 percent while the share of American families with dual-earning couples soared from 20.4 percent to 42.4 percent.” This has helped Americans fight against declining income, but hefty costs are associated with both spouses working. One major cost of dual income families is childcare, “in 2007, fees in licensed centers ranged from $10,920 a year for 4-year-old children to $14,647 a year for infants.” Dual income families can greatly benefit from working with a financial planner as they typically have less time and energy to focus on their financial priorities. Dual income families tend to spend more and save less on a percentage of earnings scale than single income families.
4) “Collapsing investment returns”
While more people are left to manage their own investments as employers move to defined contribution based retirement plans, the ability to achieve “…a meaningful rate of return, at least 8 percent a year, have evaporated. For example, stocks have earned slightly more than 2 percent a year in the last decade – the average annual return of the S&P 500 between 2002 and 2012 has been 1.8 percent.” Advisors can help guide investment choices and encourage clients to continue to invest in the market, and have faith that returns will work their way up to provide a more meaningful rate over the long hall.
5) “Insufficient savings”
Insufficient savings, especially when coupled with low fixed income streams in retirement, is a reason why the retirement dream will not be a reality for most Americans. “According to the Employee Benefits Research Institute, 17 percent had more than $250,000 saved up in 2011. The report does not even say what percent have more than $1 million. 60 percent of those surveyed reported having saved up less than $50,000.” The survey included both workers and retirees, and the results above were for the retirees, although the workers retirement savings were similar. The survey found 62% of workers thought it was possible to save $25 a week for retirement, amounting to $1,300 a year, yet 29% of workers reported having less than $1,000 saved. This shows a disconnection between what workers feels they can save compared to what they are actually saving. Financial planners can point out the importance of saving for retirement, highlighting to workers the advantages of participating in an employee sponsored retirement plan.
6) “Inheritance too small”
If you don’t have enough saved for retirement, there is always the hope that a future inheritance will help fill that gap. Around 70% of Americans of the baby boomer era will receive an inheritance, standing to inherit a total of $8.4 trillion in total, which sounds like a lot to me. However, the article indicates the “average boomer household will take in $300,000…” which is likely not enough for many Americans to fill the gap between their spending need, monthly income and retirement savings.