We’ve all seen the systemic changes brought about by the pandemic. These structural changes include the wide acceptance of work-from-home arrangements and mass resignations in the workforce – particularly among younger workers. Another aspect worth exploring is the increased rate of retirement among adults.
Retirements have certainly hastened, likely from reasons dissimilar to past crises, and financial advisors should be primed for the impending shift. As financial professionals explain, these changes necessitate creative solutions to retirement planning in 2022 and beyond.
Rising Number of Retirees
The events of the past two years have caused an increase in the number of retirees, and the acceleration is apparent.
According to a Pew Research Center survey, about half of US adults 55 and older have been out of the labor force due to retirement. This reported portion of the demographic is an increase of more than two percentage points from pre-pandemic levels — from 48.1% in the third quarter of 2019 to 50.3% as of the third quarter of 2021.
The same study shows an even more significant increase in retirees for the 65 to 74 age group of almost three percentage points — from 64% to 66.9% — from pre-pandemic levels to now.
The Underlying Economic Conditions
While it remains unclear if these trends are going to persist, it is evident that today’s circumstances are different from the mass retirement conditions observed in previous financial crises.
For instance, the values of financial assets have been rising due to the increase in home prices and stock market levels. Home prices have been increasing as demand for properties away from congested offices continues to grow. Likewise, the stock market has been at an all-time high, despite the sharp decline in 2020 when fears and cases of COVID-19 initially started to spread.
This “boom” contrasts the falling prices observed in the Global Financial Crisis of the late 2000s. So while both periods saw increasing retirement rates, the underlying conditions were very much different.
Challenges to Consider
The ballooning part of the population who are up for retirement will be facing greater challenges in the coming decades. These include the increasing life expectancies of adults and rising healthcare costs, both amplified by the retirement plan withdrawals seen during the pandemic lockdowns.
Increasing Life Expectancies
Increasing life expectancy is a retirement risk, particularly when retirees outlive their assets. If retirement plans remain pegged on dated statistics, then these projections may fall short.
By and large, life expectancy has increased due to better medicines and technology. Since the 1980s, life expectancy in the US and comparable countries has steadily improved. According to the Peterson Center on Healthcare and KFF (Kaiser Family Foundation), life expectancy in the US has improved from 73.7 to 78.8 years old.
One footnote to bear in mind is the lower life expectancies of the last few years brought about by the COVID-19 virus. Life expectancy in the US for 2020 dropped to 77 years old, or a decline of over 2.2%. That said, we can reasonably classify these as outliers and expect the trend towards longer lives to continue.
Rising Healthcare Costs
One trend that’s been frequently remarked on the Consumer Price Index for the Elderly, or CPI-E, is how medical care inflation is rising faster than most other goods and services. Since 1982, medical care inflation has been 4.4% vs. 2.7% for other CPI components.
If this trend endures, then retirement savings could be insufficient. (And the disparity is potentially severe.) The 1.7% difference in growth rate between medical care and other components translates to a 15% shortfall in value in ten years.
Inflation risk is also a related concern, particularly because not every investment is hedged against it. As inflation worsens, the expected shortfall of unhedged portfolios increases, too.
Retirement Plan Withdrawals
These challenges are only exacerbated by the retirement plan withdrawals stimulated by the 2020 CARES Act — Coronavirus Aid, Relief, and Economic Security. Under the CARES Act, people were allowed penalty-free withdrawals on their 401(k)s and IRAs. The financial hardships clearly left people with very little choice but to withdraw.
Unfortunately, many people haven’t replenished their funds, and there are real risks of retirement plans falling short.
Financial Wellness Forums
All things considered, there is a strong need to improve financial awareness and wellness for pre-retirees. Financial advisors have an obligation to ensure future retirees maintain enough retirement income to cover rising healthcare costs and longer retirements.
There are many ways to address these concerns, such as optimizing a portfolio to enjoy tax-free income in retirement. Wittman Wealth Management president Terrence D. Wittman, MBA, offers many solutions we can put forward, including tax deferral strategies for building wealth today.
Over the past 25+ years in the Financial Services industry, Terrence has helped hundreds of individuals and small business owners set themselves up for retirement using unique Tax Deferral strategies to not only defer taxes, sometimes indefinitely, but in some cases create complete Tax Free Income in Retirement. In doing so, his firm is now assisting clients in 11 states and expanding.
As financial advisors in a dynamic market, our duty is to explore the best solutions and improve the public’s financial wellness — with exceptional care for future retirees.
Getting Ready for Retirement
The growing challenges combined with the increasing number of retirees will require creative ways of preparing for retirement. Traditional retirement planning methods suggest crude solutions like extending working years before retiring, planning to spend less in retirement, taking on more risks in hopes of greater returns, or simply saving more money now. They are simple but not ideal.
Besides, these primitive fixes are not as foolproof as they once were, leaving people anxious and in need of post-pandemic strategies. Walter C Young III MBA RICP of One Strategic Capital is one proponent of creative solutions for retirement.
Traditional retirement planning is failing retirees, leaving them anxious about retirement. Retirees are typically given four frustrating options to improve their situations. But what if there was a 5th option? One so powerful it changes the equation entirely for retirees. Walter C Young III has written the Amazon best-selling book The 5th Option that gives retirees new strategies to successfully navigate the modern retirement.
These creative solutions call for a combination of strategies that address both longevity risk as well as volatility risk. Future retirees could, say, add a cash buffer account to mitigate market risks. Or they could buy a Single Pay Immediate Annuity (SPIA) for guaranteed income in retirement. Another option is to combine annuities with a permanent cash balance life insurance. The list is limited only by the advisor’s imagination.
Retirement in 2022
Pre-retirees need financial advisors more than ever. The systemic shifts caused by the pandemic make traditional retirement planning strategies less predictable than they once were. While potentially problematic, these challenges also present better opportunities for vigilant financial professionals who are willing to adapt.