What Retirement Really Means Today

Retirement doesn’t mean what it used to. For one thing, retirement lasts longer these days. But more important, how much money you’ll have and how you’ll spend your time are mostly up to you.

Retirement is in the midst of an extreme makeover.

As Americans live longer and companies drastically alter employee retirement programs, you may need to totally rethink your definition of retirement and how to plan for it.

Pensions have gone the way of black-and-white TVs, and Social Security will provide just a fraction of the income needed for wealthy retirees. The bulk of your retirement income will likely come from the money you put away in your 401(k), IRA, and other accounts.

In this new world of “retirement reinvented,” you should think of yourself as the chief architect in building (and managing) your retirement plan. That kind of thinking will help you do the type of things you want to do in retirement, from visiting exotic places to starting a business to spending more time with your family.
Understanding the following five key retirement trends will help you plan your financial future:
Trend 1: You need to make your own retirement plan.
The traditional employer-provided pension has pretty much been replaced by employer-sponsored retirement accounts such as 401(k) and government 457 plans. These types of plans require employees to set aside a portion of their salary for retirement and to decide how to invest their savings. That’s if your employer even offers a 401(k) type plan.
Trend 2: Your retirement could span 30 years … or more.
America is growing older, and most older Americans are women. According to projections, the population age 65 and older is expected to nearly double between 2012 and 2050 from 43.1 million to 83.7 million. And the number of the "oldest old" — those 85 and older — is projected to triple from 5.9 million to 18 million by 2050.1 While older women continue to outnumber older men today and that is expected to continue, life expectancy for men is projected to increase more for men than women.

So if you retire at 65, there’s a pretty good chance you’ll live two to three decades in retirement. That’s why you’ll want retirement income that can support you over these decades.
Trend 3: Your out-of-pocket health costs in retirement could exceed $240,000.
Here’s the new math: Your longevity + the spiraling cost of health care = potentially enormous medical bills during your retirement. Even after you become eligible for Medicare at 65, you’ll still pay out plenty for health care.
A 65-year-old couple, both with the median drug expenses, as of 2014 would need $241,000 to have a 90% chance of having enough money to cover health care expenses (excluding long-term care) over their remaining lifetimes2
For starters, there’s the monthly premium for Medicare Part B (for doctors’ bills and other medical services). In 2015, most new enrollees will pay a premium of $104.90 per month and a 20% co-payment after reaching the $147 deductible for Part B coverage. On top of that are coinsurance costs and extra payments for prescription drug coverage. That’s why you’ll almost certainly want to buy a Medigap, or Medicare supplement, policy that can fill in some of the coverage holes of standard Medicare. For more a detailed description of these plans and costs, visit the Medicare website, www.medicare.gov.

Keep in mind that Medicare doesn’t cover nursing home, home-health care and assisted living expenses, so you may want to consider purchasing long-term care insurance.
Trend 4: You may need to make your money last a very long time.
You, and growing numbers of retirees, will need to figure out how to convert your 401(k) and IRA accounts into steady income streams to avoid outliving your money. It’ll be tricky.

How quickly you draw down your assets will be one of the most important determinants of how long your savings last. By withdrawing too much, you could deplete your savings too quickly and potentially outlive your money. the withdrawal rate that's right for you depends upon your personal expenses, longevity expectations, and income sources.
IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. 3/1/2013
Trend 5: Work may be a part of your retirement.
Retirement won’t be the way it was for your parents or grandparents who stopped work at 65 and then lived another 10 years. Fortunately, employers are likely to be increasingly open to creating part-time and flexible working arrangements for “retired” workers because of a projected labor shortage.

The ability to downshift to a less demanding job paying even a fraction of your last career job may be all it takes to keep your savings from shrinking too fast. In addition, the camaraderie and satisfaction from continuing to work may make for a happier retirement.

A bridge job between age 65 and 75 or so could leave you with 10 or 20 years to kick back and totally relax in your 80s … and beyond.

Key Points:

  • Since your retirement could span 30 years or longer, you’ll want to create a strategy to help make your retirement money last several decades.
  • You could be looking at needing more than $240,000 to cover health care costs in retirement.
  • As employers begin offering flexible work arrangements, continuing to work may become a more attractive option.

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