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The
Changing Face of Retirement: What is Retirement?
Retirement
means different things to different people. Can you remember the
first time you heard the word retirement? Was it in relationship
to a parent or grandparent’s retirement? I remember my grandparents
being retired in 1954. In the eyes of a five-year-old, they were
old and perhaps too feeble to work. I grew up thinking that retirement
meant staying home all day watching soap operas until one died.
When my parents retired in the early ’90s, they weren’t so old.
In fact, they got bored staying home and had to look for things
to do to keep themselves busy. My dad even went out and got a job
just to feel useful (and to keep from driving my mom nuts). He worked
to the very end.
The
nature of retirement has changed over time. In fact, the concept
of retirement is a 20th _Century invention. Prior to the 20th -Century
it was practically unheard of for a person to retire. Unless they
were unusually wealthy, persons typically worked until they were
unable, at which point their children cared for them until they
died a few years later. After the industrial revolution, when human
society became less agrarian, the retirement plan was born. This
typically was a fund established by employers to provide a defined
income benefit to workers after they could no longer work. The average
retiree lived only 10 years after retirement at that time. Such
defined benefit plans would be the dominant source of retirement
funding for roughly 80 years. By the mid-20th—Century, the average
retirement age dropped to 67 years old, and today the average retirement
age is 62 years old, with an average life expectancy of another
20 years. Over the years, you can see that the length of time in
retirement has increased dramatically.
Retirees
also view preparing for retirement differently now than did our
grandparents. In the first half of the 20th—Century, workers tended
to stay with the same employer for 30 years or more, and relied
heavily upon their employer-guaranteed pensions at retirement. Today,
the average worker will change jobs nine times by age 38. The initial
dependence on employer-funded defined benefit plans has diminished,
giving way to reliance on defined contribution and 401(k) plans
funded by flexible employer and employee contributions. This represents
a fundamental switch in retirement funding responsibility, since
under a defined benefit plan the employer guarantees a retirement
benefit and bears the investment risk of the plan’s assets, whereas
in a defined contribution plan there is no employer-guarantee of
benefits and the participant bears the investment risk...
Now
that a significant portion of the burden of funding retirement has
shifted to the employee, personal financial planning for retirement
has become more important. Where once we relied upon insurance companies,
actuaries, and employers to determine retirement benefits, we now
have to rely more heavily upon ourselves to provide for the kind
of retirement we want.
Here
are some helpful guidelines to start the planning process:
Determine what retirement means to you.
Planners
describe three stages of retirement: early, middle, and end. In
the early stages, retirement may be nothing more than a career change.
After investing many years with several employers, an employee may
feel he or she is ready to do something else—perhaps a different
job working on his or her own terms, maybe consulting in the same
field, or possibly starting a new business or lucrative hobby. Usually
the early and middle stages of retirement involve cutting back on
actual work hours and increasing leisure activities, too. What makes
this retirement is that the retiree will need additional cash flow
to maintain the lifestyle he or she wants. By the middle stage of
retirement, leisure activities replace work activities. There will
come a point where one will quit work and/or cut back on leisure
activities entirely—willingly or unwillingly. This is the final
state of retirement. At some point, this may require assisted living
care or nursing home services.
In
starting to plan for retirement it is important to identify the
activities one will engage in during the three stages of retirement,
their duration, and cost. While much of this relies upon guesswork,
it is not entirely unscientific. Planning for something you want
to happen is better than not planning and having to accept what
happens to you.
Plan your retirement budget
If
you were to retire tomorrow, how much monthly income would you need
to achieve your retirement goals? It’s that simple. Make a list
of all the things you do that require money. Write down how much
they cost. Do this for a few years out (if possible) then find the
average monthly cost.
Now,
where will the cash come from? Often, financial planners tell clients
that retirement income is like a three-legged stool. In order to
work, a stool must have at least three legs to support you. Similarly,
your retirement income has three legs to support you: income from
employer retirement plans, income from Social Security, and income
from accumulated personal savings or IRAs. If any one source is
missing or short, the stool will be shaky.
It
is relatively easy to determine how much you can expect from Social
Security. The Social Security Administration is required to send
you an earnings statement each year that will list, among other
things, your estimated benefit, or you can just ask the administration
(www.ssa.gov). You can probably accurately estimate how much you
will get from employer-sponsored plans by referring to your account
statement, or by asking your employer. But how much you will get
from your own assets and IRAs depends upon how much you save and
how you save it.
In
our next article, we will explore how to make sure the retirement
income stool doesn’t wobble.
Retirement
Central has been provided by BISYS® for the benefit of Scottrade's
customers and friends. It is understood that neither Scottrade nor
BISYS is providing legal, tax, accounting, financial planning or
estate planning advice by providing this site. Retirement Central
should be used for informational purposes only and does not represent
a recommendation, solicitation, or an offer to buy or sell any particular
security. Scottrade does not represent this resource as a complete
list or description of retirement situations. This information is
obtained from sources we consider reliable, but we have not independently
verified such information and its accuracy and completeness are
not guaranteed. Customers are responsible for making their own investment
decisions and will be solely responsible for the appropriateness
and suitability of any investments they choose. This information
is not meant to replace competent professional advice, if you have
questions please consult a tax, legal, or financial professional.
