The only constant in life is change. But it’s shocking how quickly the notion of retirement has changed in recent memory.
A century ago, there was no Social Security, Medicare, or health insurance. Pensions didn’t take off in the private sector until the Internal Revenue Act of 1921 made pension contributions tax-deductible for corporations. Fast-forward to 50 years ago, and retirement accounts such as the 401(k) and IRA had yet to be invented.
Even in the last 25 years, retirement planning has evolved rapidly. The “sacred cows” and assumptions of today’s retirement planning looked very different a mere 25 years ago, and in another 25 years, the financial landscape will look different still.
Here’s how retirement has changed in the last 25 years, and which trends to watch out for as you plan and save for your own retirement.
1. Real Social Security Benefits Have Declined
Between 1975 and 1984, the Social Security Administration’s (SSA) annual cost-of-living adjustment (COLA) averaged 7.7% – higher than inflation. The highest annual increase was a startling 14.3%.
Things have changed. In the 10 years between 2009 and 2018, the average COLA was a paltry 1.36%, and in three of those 10 years, there was no COLA whatsoever. A study by The Senior Citizens League found that, as a result, the real buying power of Social Security benefits declined by a whopping 30% from 2000 to 2017.
Why has Uncle Sam grown so tight-fisted? Because Social Security is notoriously headed toward insolvency. Not in some vague “problem for another day” sense, but in an “it’s losing money as we speak” sense. In 2016, the Social Security Administration forecast that by 2020, costs would surpass revenues. Two short years later, the SSA admitted they were already spending more than they were collecting. Their estimate for an insolvency date is 2034. But how Washington will handle this political and fiscal fiasco is anyone’s guess.
What’s less disputable is how it affects your retirement planning. Don’t expect Social Security to bail you out when it comes time to retire. Be prepared to cover your own retirement expenses as the Social Security well continues drying up.
2. Employers Are Transitioning From Pensions to Contribution Accounts
Even as recently as 25 years ago, pensions were far more widespread than they are today. The last half-century has seen a transition away from defined-benefit plans – better known as pensions – and toward defined contribution plans, such as 401(k) and 403(b) accounts. As the name suggests, in these plans, employers offer to contribute a certain amount each month to the employee’s retirement, rather than paying them a certain amount each month for the rest of their lives.
This graph from the Government Accountability Office sums it up nicely:
Further, existing pensions have increasingly aimed to buy out beneficiaries and get out from under the onus of indefinite payments. It’s a trend called “de-risking,” in which a pension fund offers the employee a one-time buyout payment, rather than ongoing payments for life. The overwhelming majority (86%) of pension sponsors are pursuing de-risking, according to the Pension Benefit Guaranty Corporation.
De-risking for older workers and the decline of pensions for younger workers isn’t necessarily a problem. However, many younger workers don’t have access to a defined contribution account due to the rise of the gig economy (more on that below). Without an employer-sponsored, defined-benefit account such as a 401(k), workers can still max out an IRA. Self-employed workers, even those considered 1099 workers, can take advantage of SEP IRA accounts and their higher contribution limits.
3. The Rise of the Gig Economy (and the Fall of Retirement Benefits)
A troubling 41% of millennials who work full-time don’t have access to an employer-sponsored retirement plan of any kind, according to a 2017 Pew study. The study went on to note that even millennials who do have access to an employer retirement plan often don’t use it; only 31% of employed millennials participated in an employer retirement plan.
Part of the reason for this lack of access is the rise of the gig economy and contracted workers who receive a 1099 form rather than a W-2 like traditional employees. A 2018 NPR/Marist poll found that one in five jobs are 1099 gigs, rather than W-2 jobs with benefits. A 2018 Gallup poll found that 36% of Americans participate in the gig economy.
Don’t get me wrong; I have nothing but respect for people who take on a side business while they work a full-time job or start their own business. But Americans without an employer-sponsored retirement plan are 100% on their own for navigating concepts like safe withdrawal rates, sequence risk, and other challenges in planning and saving for their retirement.
Which begs the question: Have Americans risen to the challenge of saving for their own retirement? According to the numbers, many of them haven’t.
4. Americans Aren’t Saving Enough on Their Own
The scary retirement savings stats could fill a horror anthology. One in three Americans has nothing saved for retirement at all, according to Inc. Magazine. A study by Comet Financial Intelligence found that 42% of baby boomers have nothing saved in a retirement account. Another study, conducted by the Insured Retirement Institute, found that 70% of boomers have less than $5,000 saved for retirement. Cue the wailing and hand-wringing.
While the individual numbers and statistics vary, the portrait they paint is clear: Americans lack either the financial literacy, discipline, or means to adequately plan for and fund their own retirements. We don’t teach financial literacy in schools. It’s hardly surprising that Americans are unprepared to strategize and execute their own financial independence.
What can you do? Boost your savings rate and take advantage of automatic savings apps, like Acorns, to remove some of the discipline and willpower from the equation. Make your retirement contributions the first “expense” you pay from each paycheck, rather than an afterthought you pay with whatever happens to be left in your checking account at the end of the month.
5. Americans Are Living Longer
The most recent year of life expectancy data from the World Bank is 2016, in which Americans saw an average life expectancy of 78.7 years. Rewind the clock by 25 years to 1991, and U.S. life expectancies were more than three years shorter at 75.4 years. That adds another layer to the financial problems of American retirement planning.
Remember, Social Security benefits are shrinking. Pensions are disappearing in favor of defined contribution plans. Yet many Americans have no access to those plans, and older workers are woefully unprepared for retirement. It makes one wonder how Americans will be able to afford their greater longevity in the absence of sufficient retirement savings and income.
6. Health Care Costs Have Skyrocketed
The rise of health care costs is well-documented – not to mention obvious to anyone who has to pay for it. Adjusting for inflation to 2017 dollars, per capita health care spending in the United States more than doubled from $5,187 in 1992 to $10,739 in 2017, per the Centers for Medicare and Medicaid Services.
And it’s not getting any cheaper. A 2018 report by HealthView Services forecasts future lifetime medical costs for a 65-year-old couple at $537,334, not including long-term care. That’s over half a million dollars in future health care costs alone for the average American couple.
Health care is a far greater concern for retirees today than it was 25 years ago. Increasingly, retirees are on their own to research health insurance options, find ways to save on health care costs, and plan for ways to protect themselves from rising medical costs in the future.
7. New Medicare Part D Prescription Drug Coverage
Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Congress passed into legislation additional options for Medicare prescription drug coverage. The changes went into effect in 2006 under what’s called “Medicare Part D” coverage plans. These are private-sector plans regulated by Medicare that allow retirees to pay a monthly fee for reduced prescription drug prices.
It’s one of many new options available to lower prescription drug costs that retirees should explore. But more options are only as useful as they are understandable, so ask for help if you need it. Before committing to an expensive plan, look into cheaper prescription drug discount cards and other lower-cost options.
8. The Rise of Medicare Advantage Plans
Similar to Medicare Part D plans, “Medicare Advantage” plans – also known as “Part C” plans – are privatized but regulated Medicare plans that offer additional coverage. They’re often described as “all-in-one” Medicare plans because they cover more expenses, such as vision and dental, than traditional Medicare – for an extra premium, of course.
Medicare Advantage or Part C plans arose in the mid-1990s and have grown in complexity and popularity since. Before buying into any higher-cost Medicare Advantage plan, make sure you know your options thoroughly and speak with an insurance expert to make an informed decision.
9. Americans Are Retiring Later
Courtney Coile of Wellesley College analyzed data from the Current Population Survey and showed that in 1990, only 38% of 62- to 64-year-olds were working. That percentage rose sharply to 53% by 2017, as Bloomberg reports. Similarly, in 1997, the majority (57%) of men started taking their Social Security benefits at age 62 – the earliest age available. By 2017, that percentage dropped to only a third of men.
When Social Security benefits lose purchasing power, pensions disappear, and Americans live longer, they need to work longer. What many Americans don’t realize is that they don’t always have a choice in the matter. A study by ProPublica and the Urban Institute over several decades found that 56% of older workers had been forced out of their jobs by their employers. Another 9% were forced to resign for personal reasons, such as health failure.
You live longer, so you work longer. It makes sense on paper. But don’t count on having total control over your retirement date when you plan your retirement savings, and take steps to protect your career and job to minimize the odds of forced early retirement.
10. The Rise of the Roth Account
Roth retirement accounts didn’t exist 25 years ago. Introduced in the Tax Relief Act of 1997, they let Americans reverse the taxes on their retirement accounts. In a traditional IRA or 401(k), your contributions are tax-free for this fiscal year, but you pay taxes on the returns when you withdraw them in retirement. In a Roth IRA or 401(k), you pay taxes on contributions now, but you don’t pay any taxes in retirement on your withdrawals.
It’s a useful option, particularly for lower-income, younger adults. Another perk of Roth accounts worth mentioning is that you can use money in your Roth account to pay for your kids’ college tuition. You can even use your Roth account funds tax-free for a down payment to buy your first home.
If you don’t have a Roth account set up yet, you can do so through a company like Betterment.
11. Investors Are More Fee-Conscious
Once upon a time, mutual fund managers could make out like bandits and charge enormous expense ratios. After all, 25 years ago, most trades were handled by a money manager, and many clients never looked at individual mutual fund management fees. Today, investors can create their own brokerage account online in 30 seconds and see with their own eyes exactly what expense ratios each fund charges. It’s no surprise, then, that investors now balk at high fund management fees and are flocking away from them. Over only seven years, from 2009 to 2016, average ETF expense ratios dropped by 32%, according to the Investment Company Institute.
This increasing awareness of management fees is one of many reasons more investors are opting for passive index funds rather than actively managed funds. It’s also evidence of a growing sophistication among American investors as they’re forced to take more responsibility for their retirement planning.
Pro Tip: Blooom, which offers a free analysis of 401(k) plans, will look at the fees you’re paying for your 401(k) account. They’ll also make sure you’re properly diversified and have the right fund allocation.
Retirement “ain’t what it used to be.” Pensions and Social Security are declining. Americans are increasingly on their own for retirement planning. That means it’s up to you to determine how much you need for retirement, and how to save and invest to reach that target.
The good news is that there are more tools than ever before to help you invest and even to automate your retirement investments. You can use robo-advisors to choose an asset allocation for you and to rebalance your portfolio automatically. You can also use apps like Chime to automatically set aside money for retirement.
Rise to the occasion and take control of your own retirement planning. You certainly can’t count on someone else to do it for you.
How are you taking the reins of your own retirement planning and investing?