When imagining retirement, thoughts of peace, enjoyment, and relaxation typically come to mind—time to spend with family and get back into hobbies that have been neglected over the years. Unfortunately, though, for many Americans who are (or originally planned to be) approaching retirement, thoughts are more often those of worry, distress, and years of continued work. Why? Because we have a very large problem: for the first time in nearly 80 years, Americans are heading towards a retirement where they will be fiscally worse off than their parents.1
Could this situation have been avoided? Or, is this a case of an entire generation neglecting their personal retirement planning and spending too much during their working years? This might be true for some, but for many it is not. Certain events have taken place in the financial world over the past few decades that help account for this unfortunate situation.
Downturn of Financial Markets
1. The return on the S&P 500 from 2000-2012 has been a dreadful 1.66%.2
2. During the 2000s, there were four significant downturns: -9.1%, -11.9%, -22.1% and -37.0%, respectively in 2000, 2001, 2002 and 2008.3
Consider a hypothetical 62-year-old individual approaching retirement. In 2000, this individual would have been 50 and likely entering the peak-earnings era of his/her life. This would have also been a time period in which a significant compounding of assets could make a material difference in the quality of life after retirement. But the above market data could indicate that, depending entirely on the unique financial circumstances of this individual that are not shown here, the returns of the last decade may have ruined any chance of building expected retirement assets.
Real Estate Market Drop
In addition to the financial market downturn, residential real estate took a severe hit and left homeowners without the equity in their homes that they once counted on. According to the S&P/Case Shiller, home values have only recently bounced back to the levels that they were at almost 10 years ago in 2003 & 2004.4
Decline of the Pension Plan
Pension plans, which used to typically provide a consistent stream of retirement income for an individual, have continued to decline for the past 25 years.5 Moreover, many employers now opt for defined contribution plans (e.g. 401(k), 403(b)), which are generally more advantageous to the employer than the employee. Studies have shown that typically few employees contribute to these plans and that employee investment decisions aren’t always well informed, which can lead to a significant gap between one’s retirement resources and needs. Boston College researchers found that the average retirement balance for individuals, ages 55-64, is $120,000.6 Compare this to a recent study by Fidelity, which indicates the average couple retiring in 2012 will need $240,000 for their retirement to cover medical expenses alone!7
Doing the math, there is little (or nothing!) left for anything else.
A rise in healthcare costs, longer average life expectancies, and increased age for full social security benefits also contribute to retirement woes. 8
What can you do if you are near retirement?
Unfortunately, many retirement plans can’t be altered easily. At this point, extending working years or adjusting expenses to more closely match available assets may be a couple of options.
One very important point that needs to be made clear is that it is never too late to plan! Just because you think you are forever affected by these unfortunate events (or can no longer afford the retirement you dreamed of) doesn’t mean this is or will be the true reality of your situation. A good plan can be the best weapon in your retirement-planning arsenal.
Certified Financial Planners™ (CFPs®) can help assess your individual situation and create a comprehensive financial plan for you. Granted, it will cost money but it will also give you options and insights as to what can be done to get back on track to your retirement goals.
What can you do if you are still working towards retirement?
The key to retirement is to have a plan, stick with it, and revisit it at least annually. It’s never too early or too late to starting working with a CFP®/financial advisor. Taking this step will allow you to determine your plan for the retirement you envision.
In addition to solid planning, it’s important to manage your investment program in a disciplined manner. Discipline will help keep you on track during downturns, such as the one that occurred in the 2000s.
At Hewins Financial Advisors, we believe that investment strategies should be disciplined, efficient, and simple. Including these three factors as part of your portfolio strategy and adhering to a sound financial plan can help put you steps ahead and better prepared for retirement.