You didn?t read that title incorrectly – that?s the question I?m asking, What career will you have in retirement? For most people the answer to this question should be given at least equal weight with the more popular focus on retirement savings.
I?m not saying that we should de-emphasize retirement savings?quite the contrary. Most of us probably need to be saving more for retirement than we are, and that?s the basic problem. How much can we save between now and retirement while navigating the cost of living in an uncertain economy, and in unpredictable financial markets? Can we ever know for sure that we?ll have enough?
Another issue we need to consider is the rapid disappearance of defined benefit pension plans?the monthly retirement checks many of today?s retirees are still receiving. As enchanted as we may have become at the rapid development of self-funded/self-directed retirement accounts like IRA?s and 401K?s, the reality is that these plans have become popular largely in an attempt to cut costs by shifting the burden of retirement funding from employers to employees. Compared to people a generation ago, we?re largely on our own for retirement as most of us will reach retirement with no guaranteed monthly pension check from our employers.
Additional concerns exist over the viability of Social Security and the relentless rise in healthcare costs. Though we can?t possibly know how these situations will play out, we still need to be prepared. Most of us have centered that effort on building retirement plans with account balances sufficient in size to insulate us from all of these shortcomings, but are savings alone the solution?
Over-relying on retirement savings projections
In some form or fashion, we?ve all seen, heard and read the projections that go something like this:
If you save X percent of your salary, for X years at X return, by the time you?re 65 you?ll have X MILLION dollars saved for your retirment.
Wow! Can?t you just feel the gentle breezes blowing off the ocean near your beachfront second home in the tropics?
What?s wrong with those assumptions? Plenty.
Virtually every one of those scenarios assume perfect world contitions?low inflation rates, low interest rates, double digit stock market returns, and no financial disasters or extended periods of unemployment on our parts. Do you think that you and the world will be able to sustain such a balancing act for 20, 30, maybe 40 years between where we are now and the time we retire?
Unfortunately, four factors are working against it:
Inflation. 30 years ago people aspired to a $100,000 retirement nest egg; at then interest rates of 10-12%, you could have easily earned $1,000/mo risk free in T-bills or CD?s, which would have been a generous supplement to social security and a defined benefit pension (which many people had back then). Today we?re being told we need at least $1 million saved up, which might earn 2% risk free, or $20,000/yr. And sad reality: $12,000 would buy you a lot more in 1984 than $20,000 buys in 2014.
Post retirement inflation. If inflation between now and retirement is bad news, here?s a logical extension that?s even worse: inflation will continue even after you retire! With lifespans now running 20-30 years past age 65, this is not something to be ignored. Even if you have the right amount of funds when you retire, will it be enough ten or twenty years later? Are you prepared to reinvest a portion of your return on investment to cover inflation after you retire? Will you even be able to afford to do it?
Unpredictable stock market returns. It?s unlikely that any of us will be able to amass much of a fortune primarily by investing our money in interest bearing vehicles alone. That means that in order to reach our goals, we?ll need to take on some risk. But how much risk should we take? Within just the last 14 years, the stock market has experienced two major plunges?some would call them crashes?can we bank on steady returns against that track record?
Unpredictable employment and income between now and retirement. Funding for our retirement plans will come largely from employment and the income it provides. Not only is predicting inflation rates and stock market returns over the next few decades little better than an educated guess, but we?re also entirely unable to forcast how our income streams will hold up between now and then. One or more periods of extended unemployment will not only interrupt the flow of funds into retirment savings, but they also have the potential to see us tapping those reserves for current living expenses.
Do we have a Plan B?
The purpose of laying out the above isn?t to suggest that we abandon saving for retirement as a significant part of our planning. In fact, increasing savings is Job 1. But at the same time it?s crucial to realize that retirement savings alone will not be enough, not for the great majority of people.
Retirement planning should have five components:
- Lowering our cost of living,
- Eliminating our debts,
- Building savings, either as a reserve or to generate an investment income stream,
- Social Security, Medicare and, if available, an employer pension plan,
- Developing future income sources through employment or a business.
The lowering of living expenses and elimination of debt should be major components of any retirement planning, but cultivating mutliple income sources may prove to be the difference between a retirement in relative comfort and one of perpetual struggle. This is especially important if you?re within ten or 15 years of retirement and a little light on savings. Be realistic (meaning conservative) in your savings projections but recognize that you have plenty of time to work on the other components of your plan that can reap big benefits, even if it won?t buy you a golden retirement on an exotic beach.
This doesn?t mean however that we need to continue working in our current jobs, or even in the same careers after retirement. Part time, seasonal and contract work are possibilities to supplement income. Another consideration, if necessary, would be a full time position in an entirely different career, but one you would find so enjoyable that it wouldn?t feel like work as you?ve always known it.
An active work life means that you?ll probably have greater social interaction, sense of purpose and financial flexibilty than the traditional pure retiree enjoys.
With lower living expenses, low or no debt, a decent chunk of money saved up, and no need for a ?career?, you may be sufficiently liberated from financial concern that you can still do many of the things you?ve dreamed of doing in your later years?even if you don?t have a million dollar retirement savings plan. That set of circumstances could also provide the foundation for launching a business that you?ve dreamed of but never felt comfortable pursuing because of myriad financial obligations and a complete reliance on your job for income earlier in life.
Start planning now for the job, career or business you?d like to have when you reach the traditional retirement years. Get what ever training or experience you?ll need?doing it part time if necessary?and plan to hit the ground running when you exit your current profession for good. Work part time in a business you?d like to start for yourself, gaining valuable experience and making important contacts. Start a side business that you can grow into something more when you leave your current career.
If you like what you do now, begin developing the contacts you might need to remain employed somewhere after you cut loose. Explore a partial retirement, such as six months on/six months off, and find the employers who would entertain such an arrangement. You?ll be able to enjoy many of the benefits of retirement while still keeping your skills current.
Finally, it?s important to recognize that retirement probably won?t represent the arrival of a magical time in life when income will be plentiful and cares will suddenly disappear from our lives. Real life seldom looks like the TV version. But, rich or poor, a life filled with comfort, balance and a purposeful pursuit of happiness is always something worth working for and looking forward to.