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Redefining Retirement in the 21st Century

Key Points



When a man retires and time is no longer a matter of urgent importance, his colleagues generally present him with a clock.
- R.C. Sheriff

The days may be over when a gold watch is a somewhat ironic and less-than-useful gift for a retiree. If the experts are on target, retirement in the next century will scarcely resemble the conventional image of lazy days spent on cruise ships and golf courses. You might plan to open a business of your own. Or perhaps you'll return to school for that graduate degree you never had the chance to complete. Of course, you'll probably still find time to sit back and put your feet up.

Creating a New Life Cycle

At the turn of the 20th century, the average life expectancy was 47 years. Today, the average American can look forward to about 78 years of life. What's more, the average life expectancy for today's 65-year-old has increased to 84, according to the National Center for Health Statistics.



What's behind this trend? Some causes are obvious, such as improved health care, both early on in the form of preventative medicine and during the later years of life. Medical advances, including hypertension drugs and hip replacements, allow older Americans to remain active. Healthier lifestyles are also a contributing factor.

"People are treating their bodies with greater respect," said Dr. Sanford Finkel of the Buehler Center on Aging at Northwestern University. "They're giving up smoking, learning to eat right, and exercising regularly. Inevitably, these trends lead to healthier, longer, more productive lives."

The result is a new way of thinking about age. In her best-selling book, New Passages, Gail Sheehy argues that the "mid-life passage" generally thought to take place at age 40 now occurs a decade later. The period between ages 45 and 65 is no longer middle and old age, according to Sheehy, but a "second adulthood." Psychologist Ken Dychtwald, chief executive officer of Age Wave Inc., a California-based consulting firm, also sees new lines being drawn. Using his model, ages 25 to 40 represent young adulthood, while ages 40 to 60 comprise a new stage known as "middlescence." Next comes late adulthood (60 to 80), followed by old age (80 to 100), and very old age (100+).

But perhaps more important than the categories is the effect that longer, healthier lives may have on the traditional life cycle of education, work, and retirement. It will be replaced by a less linear cycle, according to Dychtwald, who predicts short-term retirements, followed by any combination of career shifts, part- or flex-time work, entrepreneurial endeavors, and continuing education peppered with occasional "mini-retirements."

Today's older American doesn't hesitate to change jobs - or careers - in the pursuit of keeping life interesting. This trend should accelerate. According to a study by the Bureau of Labor Statistics, the percentage of Americans aged 65 years or older who participate in the labor force is expected to increase from about 17% in 2008 to more than 22% by 2018.1

Plan for the New Retirement

So what does this redefined retirement mean to you? There is no one answer. In the coming decades, "retirement" will mean something different to each of us. Regardless of your decision, you'll need to design a financial plan suited to your specific vision of the future.

Retirement Income - A good starting point might be to examine your sources of retirement income. If you pay attention to the financial press, you've probably come across at least a few commentators who speak in gloom-and-doom terms about the future for American retirees, decrying a lack of savings and warning of the imminent growth of the elderly population.

True, there is widespread concern about at least one traditional source of income for retirees - Social Security. Under current conditions, Social Security funds could fall short of needs by 2040, according to the Social Security Administration. But the reality is that Social Security was intended only to supplement other sources of retirement income. In fact, Social Security benefits account for only 37% of the aggregate income of today's retirees, according to the Social Security Administration.

Even pension plans, once considered a staple of retirement income, only account for 17% of the retirement-income pie. In recent years, employers have been moving from traditional defined benefit plans based on salary and years of service to defined contribution plans, such as 401(k) plans, funded primarily by the employees.

This shift makes it even more important for individuals to understand their goals and have a well-thought-out financial plan that focuses on the key source of retirement income: personal savings and investments. Given the potential duration and changing nature of retirement, you may want to seek the assistance of a professional financial planner who can help you assess your needs and develop appropriate investment strategies.

As you move through the various stages of the new retirement, perhaps working at times and resting at others, your plan may require adjustments along the way. A professional advisor can help you monitor your plan and make changes when necessary. Among the factors you'll need to consider:

Time - You can project periods of retirement, reeducation, and full employment. Then concentrate on a plan to fund each of the separate periods. The number of years until you retire will influence the types of investments you include in your portfolio. If retirement is a short-term goal, investments that provide liquidity and help preserve your principal may be most suitable. On the other hand, if retirement is many years away, you may be able to include more aggressive investments in your portfolio. You will also need to keep in mind the number of years you may spend in retirement. Thirty years of retirement could soon be commonplace, requiring a larger nest egg than in the past.

Inflation - Consider this: An automobile with a price tag of $20,000 today will cost $29,600 in just 10 years, given an inflation rate of just 4%. While lower-risk fixed-income and money market investments2 may play an important role in your investment portfolio, if used alone they may leave you susceptible to the erosive effects of inflation. To help your portfolio keep pace with inflation, you may need to maintain some growth-oriented investments. Over the long-term, stocks have provided returns superior to other asset classes.3 But also keep in mind that stocks generally involve greater short-term volatility.

Taxes - Even after you retire, taxes will remain an important factor in your overall financial plan. If you return to work or open a business, for example, your tax bracket could change. In addition, should you move from one state to another, state or local taxes could affect your bottom line. Tax-advantaged investments, such as annuities and tax-free mutual funds, may be effective tools for meeting your retirement goals. Tax deferral offered by 401(k) plans and IRAs may also help your retirement savings grow.

Prepare Today for the Retirement of Tomorrow

To ensure that retirement lives up to your expectations, begin establishing your plan as early as possible and consider consulting a professional. With proper planning, you can make retirement whatever you want it to be.

Points to Remember

  1. As people live longer and healthier lives, retirement begins to take on a whole new look.
  2. You'll need to develop a financial plan suited to your specific vision of the future.
  3. Under current conditions, Social Security funds could fall short of needs by 2040.
  4. You will need to rely on your own personal savings and investments for the majority of your income in retirement.
  5. Keys to determining your financial plan are time, inflation, and taxes.


1Source: Bureau of Labor Statistics, November 2009.

2An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

3Past performance is no guarantee of future results.

© 2011 McGraw-Hill Financial Communications. All rights reserved.