The Need for Retirement Planning

For much of our history retirement in America was defined in terms of its relationship to full-time participation in the active work force. An individual would work until a certain age, and then leave employment to spend time on personal endeavors. Declining health often made retirement short, so retirement planning was about saving enough to guarantee minimal survival for a relatively brief period of time. 

Today society is beginning to recognize that the traditional view of retirement is no longer applicable. Some individuals, for example, are voluntarily choosing to retire early, in their 40s or 50s. Others, because they enjoy working, choose to remain employed well past the traditional retirement age of 65. Retirement is now often defined by activities such as travel, returning to school, volunteer work, or the pursuit of favorite hobbies or sports. 

This new concept of retirement, with all of its possibilities, does not happen automatically. Many of the issues associated with retirement, such as ill health, and the need to provide income, still exist. With proper planning, however, these needs can be met. 

Longer Lives

The single most important factor in this changed retirement picture is the fact that we now live much longer than before. A child born in 1940, for example had an average life expectancy of 62.9 years. For a child born in 2010, however, average life expectancy had increased to 78.7 years.1 The following graph illustrates this change. 

Planning for a much longer life span involves addressing problems not faced by earlier generations. Some of the key issues include the following. 

•    Paying for retirement: Providing a steady income is often the key problem involved in retirement planning. Longer life spans raise the issue of the impact of inflation on fixed dollar payments, as well as the possibility of outliving accumulated personal savings. Social Security retirement benefits and income from employer-sponsored retirement plans typically provide only a portion of the total income required. If income is insufficient, a retiree may be forced to either continue working, or face a reduced standard of living. 

•    Paying for health care: The health benefits provided through the federal government’s Medicare program are generally considered to be only a foundation. Often a supplemental Medigap policy is needed, as is a long-term care policy, to provide needed benefits not available through Medicare. Health care planning should also consider a health care proxy, allowing someone else to make medical decisions when an individual is temporarily incapacitated, as well as a living will that expresses an individual’s wishes when no hope of recovery is possible.

•    Paying for housing: This question involves not only the size and type of home (condo, house shared housing, assisted living) but also its location.  Such factors as climate and proximity to close family members and medical care are often important. Completely paying off a home loan can reduce monthly income needs. A reverse mortgage may provide additional monthly income. 

Seek Professional Guidance 

Developing a successful retirement plan involves carefully considering a wide range of issues and potential problems. Finding solutions to these questions often requires both personal education and the guidance of knowledgeable individuals, from many professional disciplines, including a Certified Financial Planner. The key is to begin planning as early as possible.