Finances in Retirement: New Challenges, New Solutions
Challenges
Numerous studies have shown that finances are the #1 worry of most Americans. Many people are reluctant to discuss money even though it is on their minds. They have little basic financial knowledge, and most do not have financial role models to emulate. As a result, the financial peace of mind that they so desperately seek can be very elusive.
One of those numerous studies, the 2017 Retirement Study , was conducted by Bank of America Merrill Lynch in partnership with Age Wave, the nation’s foremost thought leader on issues related to the aging population. To better educate and counsel Americans and lead them toward a meaningful and financially comfortable retirement, these firms wanted to identify what Americans consider to be the most important areas of life. The initiative focused on the changing environment of retirement, and it investigated retirees’ and pre-retirees’ values, experiences, preferences, worries, opportunities, and objectives.
The study found that today’s retirees believe that the most important ingredient for a happy retirement is good health, which can have a sweeping effect on quality of life, family relationships, and financial security. Coupled with this view is their #1 financial worry related to retirement, which is the uncertain and potentially high cost of health care—not to mention the fact that increasing life expectancy poses a significant challenge in modern retirement. Retirement planning is about more than meeting goals for retirement income; it is also about deciding how to live in retirement. However, remember that Americans are very worried about financial challenges in retirement.
Just three decades ago, most Americans were able to stop working in their early 60s and enjoy long and comfortable retirements. That brief golden age is over, according to the authors of the 2014 book Falling Short: The Coming Retirement Crisis and What to Do About It . The book’s coauthor, the investing legend and founder of Greenwich Associates, Charles Ellis, writes, “Our retirement income systems are contracting just as our need for retirement income is growing.” Ellis says that most people who continue working through their 60s have an important chance to save money, as the expenses of child-rearing are behind them and the higher health care costs of old age often remain distant. “You could save the full amount of your savings from extra working and invest it, boosting your 401(k) balance by 100% or more,” he said. “ Put it together with larger Social Security benefits, and more than 10 million people could go from not so good to okay .”
Although most people say that they want to live to the age of 90, only 27% of pre-retirees who are 50 or older feel financially prepared to fund a retirement lasting 10 years—let alone one lasting 20 or 30 years. In addition, 81% of these pre-retirees say that they have no idea how much money they will need to fund their retirement.
Key findings from the latest AgeWave survey of more than 4,800 respondents include the following:
- Americans are saving only a fraction of what they think they should. They are actually saving 5.5% of their annual posttax income, but they think they should be saving 25.3%.
- People say the cost of basic expenses and the need to pay down debt are the two biggest barriers to saving more for retirement. They are also far more concerned about their individual personal economy than about the economy as a whole.
- Due to low financial confidence, Americans are far more likely to second-guess decisions related to personal finance (36%) than those related to work (18%), health (15%), or living situation (8%).
- In terms of financial jargon, 65% of Americans say that financial language is confusing and not user-friendly.
Possible Solutions
As tens of millions of baby boomers begin their journeys into retirement, they are likely to make various course corrections, such as modifying their family’s spending, continuing to work, and downsizing or relocating their homes, to name a few. The AgeWave study outlined some of these course corrections:
Health: Of those AgeWave surveyed, 91% would make healthier choices to reduce potential expenses in later life, and the same percentage would make greater use of generic medications and supplies; 68% would consider purchasing long-term care insurance.
Work: Three-quarters of those surveyed would be willing to work longer to shore up their savings (however, only 43% would want to work longer while remaining full time), and 67% would be open to learning new skills so that they could work in a different job.
Giving: Three-quarters of those surveyed would volunteer more and reduce their monetary donations, 71% would consider leaving less to their loved ones, and 69% would be willing to barter their time and skills.
Finances: In the AgeWave survey, 90% of respondents would be willing to cut back on basic expenses and save more, 77% would increase their use of tax-protected retirement accounts, two-thirds would sell belongings or real estate that they no longer need, and three in five would adjust the timing of their Social Security benefits. For more solutions, see the AgeWave report.
“This study underscores that thriving in retirement requires looking through the interconnected lenses of all major life priorities – family, health, home, work, leisure, giving and finances – and anticipating how you want to live, what matters most to you, and the trade-offs you can make today to more generously fund your future self,” said Ken Dychtwald, Ph.D. , the CEO and founder of Age Wave. “Although we are all challenged to fund our longer lives, this suite of studies has repeatedly revealed that Americans remain quite hopeful and are willing to consider a wide range of course corrections in order to enjoy a secure retirement.”
