Not Your Grandma's Retirement

Long strolls on the links and puttering in the garden for hours on end may once have been the picture of living the dream in retirement. These days though, not so much. In fact retirement looks an awful lot like pre-age-65 days: working, maintaining a home, taking care of family.

Would-be retirees are living longer, are healthier than previous generations and tend to want to stay in the workforce longer, transforming traditional notions of aging, work and retirement. In short, it’s not your grandma’s retirement anymore.

AARP NH held a seminar at St. Anselm’s College in late September to discuss, among other things, the outdated views of retirement, the new-world order of retirement security, and what an aging workforce means for workers and employers in NH, the second oldest state in the country.

What does the new era of retirement look like? People are working longer out of necessity and desire; retirement nest eggs will not be sufficient; pensions are a thing of the past; and, there are fewer younger workers to fill critical positions, creating an opportunity for older workers.  

Forget 65
Retiring at 65 became the norm decades ago and hasn’t changed with the times. It has its roots in an era when people weren’t living as long. “There’s nothing really magical about the number,” says Andrew Eschtruth, associate director for external relations at the Center for Retirement Research at Boston College. “It’s obviously not the age at which you can first claim Social Security. It’s obviously not the age at which you can maximize your monthly benefit. So 65 doesn’t have any real significance even inside the Social Security program anymore.”

The reality, says Todd Fahey, state director for AARP NH, is people are living longer, are healthier and, as such, are staying in the workforce longer and want to be there.

Financial Challenges
There are some challenges that come along with this new normal. Among those, says Eschtruth, is that the current retirement income system is falling short for many households. Americans are not saving enough, Eschtruth says. According to The National Retirement Risk Index, in 2013, 52 percent of working-age households were “at risk” of being unable to maintain their pre-retirement standard of living.

“Our concern is: will people have enough money to maintain their standard of living in retirement,” Eschtruth says. “And if people continue to retire in the early to mid-60s most of them will not have enough for their whole retirement.”

As a result, Eschtruth says, Social Security will replace a shrinking share of pre-retirement earnings. According to Social Security and Medicare data in 1995, the reported replacement rate for retirees age 65 was 41 percent after Part B deductions and personal taxation. That number dropped 37 percent in 2015 and is expected to fall 31 percent by 2035.

Furthermore, the way companies help employees plan for retirement is also changing. Nationally, more employers have shifted away from pensions, opting instead for 401(k)s. In 1983, only 12 percent of employers offered a 401(k), while 62 percent offered a defined pension benefit. In 2016, however, only 17 percent offered a defined pension benefit, while 73 percent offered a 401(k).

And that might be okay, Eschtruth says, except it is common for people to make mistakes with 401(k)s including not participating, not contributing enough and having assets in high fee funds. But even with all the possible mistakes, having a 401(k) is better than not having one at all since statistically, most people don’t save on their own, Eschtruth says.

It is much easier to save enough if you start saving early or work later, Eschtruth says, and even better if you do both. According to the Center for Retirement Research, if a 25-year-old medium earner started saving today, he or she would have to put set aside only 15 percent to be able to get to 70 percent replacement by age 62. That number goes up to 24 percent at age 35 and 44 percent at age 45.

Those numbers get even better if those same workers wait until age 70 to retire, Eschtruth says. The 25-year-old would only have to set aside 4 percent, the 35-year-old 6 percent and the 45-year-old 10 percent.

Waiting until 70 to retire also means being able to get a bigger monthly stipend from Social Security, says Christina Martin-Firvida, director of financial security and consumer affairs for AARP. She explains that a person retiring at age 62 is getting 75 percent of Social Security’s benchmark amount per month. But a person who retires at age 70 will get 130 percent of social security’s benchmark amount per month.  

As for improving the 401(k) system, the first step is to get people to use them. Eschtruth says only half of private sector workers have an employer savings plan. Further, 21 percent of individuals are not participating in a 401(k) program, and 59 percent of those that are participating only contribute 6 percent or less.

“Many people don’t have access to a retirement plan at work,” says Lori Trawinski, director of the Financial Security Team for the AARP Public Policy Institute, speaking specifically of 401(k)s. “Some employers don’t offer that, particularly smaller employers,” she says. “So we find when people don’t have access to a plan through their employer, they are much less likely to save for retirement at all. And those who do have access, we’re still seeing that people are not contributing enough to get the employer match, and that’s really unfortunate, because that’s leaving money on the table.”
Eschtruth recommends getting people to invest more money into plans by making them fully automatic. In 2016, 45 percent of plans had automatic enrollment and only 35 percent have automatic escalation where they increase contribution rates over time.

He also says it’s important to stop the money leaking out of the 401(k)s. In 2016, on average, people were losing a total of about 1.5 percent of their savings to cash outs, hardship withdrawals, post 59 ½ withdrawals (59 is the earliest age people can start drawing from a 401(k)) and loan defaults.

Develop a Personal Plan
If waiting until age 70 to retire is not in the cards, Martin-Firvida says people at least still need a plan. “You don’t have to work longer if you don’t want to. You can plan on retiring early,” she says. “But you need to think about what you would do. How you would return to the workforce if you needed to? And planning for your retirement income also has a place.”

Martin-Firvida says one way to do this is to plan for the higher wage earner in the household to delay taking his or her Social Security benefit in order for both people to get more retirement income.

She also suggests working only part time and supplementing or living off of savings first before tapping into Social Security.

Martin-Firvida adds, “It’s all about how do you make your retirement earnings last so that you can make the best of your retirement savings.”

Finally, Eschtruth also advocates seeing the house as an asset.

“We need to convince retirees to view their house as a potential source of income,” Eschtruth says. “People can get money from their house in two main ways: downsize or take a reverse mortgage.”

The benefits to selling the house and buying something smaller are obvious: you can keep some of the proceeds from the sale as well as establish equity in a new home. With a reverse mortgage, you get to add to your income and live in your home, but you lose the equity you could tap or leave as a bequest.

“Sometimes we end up sounding like the doom and gloom people here. ‘You have to work, you have to work,’” Eschtruth says. “And people will say, ‘oh you mean I’m going die at my desk.’ We don’t want anyone to die at their desk.” But by making a few changes Eschtruth continues, “it’s very feasible that people will still be able to enjoy their retirement, and they’ll have more income security because of it.”