Redefining retirement in the 21st century

When a man retires and time is no longer a matter of urgent importance, his colleagues generally present him with a watch.
— 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 newborn can look forward to 76.4 years of life. What's more, the average life expectancy for today's 65-year-old has increased to 83.4, according to the Center for Disease Control's latest mortality statistics.Footnote 1
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."

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 definition, 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 2034, 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 about a third of the aggregate income of today's retirees, according to the Social Security Administration.
Even pension plans, once considered a staple of retirement income, account for only a small share 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 employee.
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 sources 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 some times and resting at others, your plan may require adjustments along the way. A financial professional 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 $30,000 today will cost over $40,000 in just 10 years, given an inflation rate of just 3%. While lower risk fixed-income and money market investmentsFootnote 2 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 offered the potential for returns superior to those of other major asset classes, such as bonds or cash alternatives.Footnote 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. Investments that offer potential tax advantages 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.

Footnote 1 Source: Center for Disease Control and Prevention, Mortality in the United States 2021, NCHS Data Brief No. 456, December 2022.

Footnote 2 An 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.

Footnote 3 Past performance is no guarantee of future results. cash alternatives are short-term securities that can be readily converted to cash, such as U.S. Treasury bills. Note that cash alternatives may not be federally guaranteed or insured and that is possible to lose money by investing in cash alternatives. Returns on cash alternatives may not keep pace with inflation, so you could lose purchasing power.

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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

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