Our expectations about retirement are so late-20th century. Even after the financial crises of the past 10 years and despite the extended life spans many will achieve, retirement continues to be portrayed as a period when work ceases and “life” begins. Grandchildren, travel, and days of leisure await those who did the proper planning and right amount of saving.
For the majority of Americans, this notion has become a fantasy.
The truth is, the retirement advice industry is lagging behind the new reality clients are facing. Advisers remain fixated on helping clients set dates and dollar amounts. Should they retire at 65 or 70? Will a $1 million nest egg be enough? What's the right drawdown — 4% a year?
Retirement in America used to be something people did every evening to get re-energized for the next day's labor. Retirement in the modern era will likely be a time of new work, not no work — a time when people transition to new careers after being retrained and outfitted. Do you see how this changes the entire notion of retirement planning?
Now, instead of focusing on dates, nest eggs and drawdown amounts, advisers must help clients prepare for the last segment of life, a time when they likely will work both at a job and on their golf game.
In this version of retirement, individuals and society are better off. Not only does it provide more financial security to retirees, there are positive psychological benefits. Those who work in retirement typically report feeling happier and more fulfilled than those whose professional lives shift into idle.
Businesses and workplaces also benefit as the skills and knowledge acquired by older workers can be more easily transferred to younger generations. Despite the impression that older workers have to get out of the way to make room for younger workers, employment opportunities are more abundant for all workers when older workers stay in the workforce. This is due to the wealth that workers create — they don't get paid to destroy value — which creates opportunities for others, as well.
Qualifying for age-dependent benefits, such as
Social Security and Medicare, no longer is synonymous with traditional retirement. (And we'll debunk that “tradition” shortly.) Some people may not be ready — mentally, let alone financially — to stop working completely.
Dire statistics demonstrate that the vast majority of Americans do not have the financial means to retire. Despite efforts to educate people on the need to plan and save, only two-thirds of Americans have saved anything towards retirement, according to the most recent Retirement Confidence Survey. Unfortunately, 57% of people have saved less than $25,000, not including ownership in their primary home and defined-benefit plans. Shockingly, 28% say they've saved less than $1,000. Clearly, this is not enough money to afford what we consider a traditional retirement.
In addition to the financial challenges posed by the traditional notion of retirement, there is also the psychological dimension as to whether people really want to leave the workplace at a pre-determined age. Many of today's 65-year-olds have the energy and desire to continue working, though perhaps in a different capacity. Working in retirement doesn't necessarily mean toiling away at the same job as in preretirement. It can mean taking the opportunity to learn new skills and work in a different area. It can mean working part time rather than full time or negotiating a benefits package that involves more paid — or unpaid — time off.
Employers may want to rethink their compulsory retirement policies, as well. Historically, mandatory retirement served as a humane way to escort less productive, yet highly compensated workers out the door. Thinking out of the box, employers may want to craft work arrangements that keep knowledgeable workers on the payroll in some capacity other than 9-to-5. Older employees may not even require health benefits because they can obtain coverage under Medicare.
UNTRADITIONAL RETIREMENT
Retirement is a fairly recent phenomenon. In the past, life expectancy was much shorter, and if you were lucky enough to live a relatively long life, you worked until you were no longer capable … and you didn't live long after you stopped working. Even now, different cultures consider it normal to continue working for as long as you are able, though perhaps in a different capacity. This can be seen across the globe. While citizens can start claiming benefits between the ages of 60 and 65 in Mexico, Chile, Japan, Korea, and Turkey, the average retirement age in 2013 is still about 70.
In the U.S., however, we saw a notable drop in the labor force participation rate of men 65 or older after the Social Security Act was implemented in 1935.
In 1850, 76.6% of men 65 or older were in the labor force (working or looking for work). Disability was the main reason someone was out of the labor force.
The labor force participation rate trended down to 58% in 1930, mainly because of the Great Depression. By 1940, it was 43.5% and by 2000 it was 17.5%. Clearly, something significant changed for the elderly. Income security in retirement made it less important for people capable of working to do so.
The economic recovery that began in July 2009 has seen labor force participation rates of the elderly begin to increase. This may be because Social Security payments are inadequate to fund a desirable retirement lifestyle and financial market conditions decimated already inadequate retirement savings.
The trend of lower labor force participation among the elderly, seen between the 1940s and 2000, was likely an aberration. We are already seeing higher labor force participation rates as Americans who are living longer look to supplement their retirement income with earned income.
STRATEGIZE, DON'T PLAN
Financial advisers need to help clients move beyond the old notion of retirement as a time of all play and no work. This is not the life that many will have in their golden years, so planning for it is counterproductive.
By helping clients reframe what retirement means, advisers can help ease the anxiety many clients feel as they approach what Social Security deems “full retirement age.”
Change the nomenclature. Think strategy rather than plan. A strategy allows for contingencies. It specifies types of actions to take depending on what scenario unfolds. A plan can be in support of a strategy, but when situations change, plans must change.
Discussing strategies rather than creating a plan allows an adviser and client to consider multiple scenarios for retirement — saving one dollar amount can mean one lifestyle, but hitting other asset levels may simply be interpreted as a need to get used to a different lifestyle, as opposed to failing to achieve retirement. Setting goals is important, but when a goal is realistically unattainable, clients will just give up trying. Adding flexibility to a goal and flexibility to a financial plan can make retirement seem more realistic and achievable.
NEW RETIREMENT, NEW OPPORTUNITIES
A financial planner who broaches retirement discussions with, “What next?” rather than, “When?” will help clients feel less anxious about retirement, less conservative with their investments and more realistic about what the next phase of life will be like.
When people let go of outdated expectations for a traditional retirement and embrace the idea of working in their later years, they will look to their adviser for another level of planning and guidance.
We used to think of retirement planning as a three-legged stool: Social Security, savings, and a defined-benefit plan. Advisers will provide an important value to their clients when they add a new leg — work — turning that stool into a sturdy chair.
Brian Jacobsen is chief portfolio strategist at Wells Fargo Funds Management. He researches economies, finance and investing for Wells Fargo Advantage Funds portfolio managers and institutional and retail investors. In addition, Mr. Jacobsen is an associate professor at Wisconsin Lutheran College where he is the director of the Financial Planning Program.
Wayne Badorf is head of intermediary sales at Wells Fargo Asset Management and president of Wells Fargo Funds Distributor. He and his sales teams are responsible for the distribution of mutual funds, money market funds, and separately managed accounts through national, regional, and independent broker/dealers and other institutional advisers. With more than 20 years in the business, he speaks to industry audiences on a wide range of financial topics with an emphasis on best practices.
