A Retirement Plan for all Generations in 2021 – Nothing is Impossible

Retirement Plan for All Generations

What does the term “Retirement” suggest? It is a unique definition for every individual. It could be sitting on the beaches of L.A. getting a tan, hiking on trails in Maine, spending time with grandchildren, going to the games every season, maybe even cracking open a can of beer, and sitting in front of the television feet up. For some, it is about pursuing hobbies and plans at the back of their head; for others, it would mean they finally get the rest they want and deserve. Imagine, the kids have moved out; there are no more mortgages to pay. All that is left to do now is to quit that job and finally go after long-overdue life-plans.

With the mention of life-plans, people want to know how to catch up on retirement savings to afford these retirement dreams. This thought can often give people a lot of anxiety and fear, which often discourages them from giving up on saving money. Even typical retirement savings, such as having a retirement fund, can help achieve the goal. It is not as easy as people think it is, making them feel quite overwhelmed, and they abandon the idea of saving. Saving for retirement seems impossible, and their outlook on retirement doesn’t change. Also, retirement always seems too far in the future to be prioritizing over present problems, which makes people choose their expenditure on living for the present.

Statistics as per Fidelity Investments’ Retirement Savings Assessment for 2020

Statistics as per Fidelity Investments' Retirement Savings Assessment
Statistics as per Fidelity Investments’ Retirement Savings Assessment

Based on this assessment for 2020, the statistical data obtained were quite impressive. Around 46% of America does not save enough money for retirement, which is appalling, given how close they are to retirement. They are creating an earning and spending pattern. In turn, this pattern increases the risk they are putting themselves in. Not preparing for the future will prevent them from accessing basic amenities and necessities when they cannot earn. For instance, paying for food, rent, electricity bills, mortgage, etc., will become exceedingly difficult to pay for once they quit working.

As per the statistics, the American Retirement Score is a healthy 83, which lies in a “good zone,” which means a typical retirement saver has a target of 83% of the income Fidelity estimates needed to make up the retirement costs.

54% of the individuals in America who are in the category of “good zone” will cover necessary expenses during their retirement tenure.

As per the survey, the following generations have the 2021 scores as shown, concerning their preparedness for retirement:

1.Baby Boomers – They are the individuals who lie in the age range of 55 – 73 years. They have a score of 87, which indicates that they will cover the essentials of retirement but will not work if there is a sudden shortfall.

2. Generation X – They are individuals who lie in 39 – 54 years. The scores as compared to 2018 have dropped for them. They have a score of 80, which is a 3 point drop from the 2018 score. Gen X retirement plans will start to look a little risky if they do not increase their savings.

3. Millennials – As per the studies, this is the second time Millennials have crossed Generation X in terms of preparedness. They have a score of 82. They do have the advantage of saving up enough when it is their turn to retire.

Retirement years and respective generations

In terms of retirement, what is of utmost importance is the timing and planning. People of all ages must plan for the future because it affects the generations based on how prepared they are. Below is a little glimpse at what the Baby Boomers, Generation X, and Millennials face and what steps they will need to take if they wish to be financially independent.

Millennials: This generation is usually born between the years 1980 – 1994. Their retirement year starts from 2042 – 2056.

Generation X – This generation of individuals are born between the years 1965 – 1979. Their retirement starts somewhere between the year 2027 – 2041.

Baby Boomers – The individuals in the gen are born between the period 1946 – 1964. They retire somewhere between the period 2008 – 2026.

Silent Gen – They were born between 1925 and 1945, while their retirement period started around 1987 – 2007.

Greatest Gen – This generation of individuals were born somewhere between 1900 – 1924. They must have had a retirement period starting between 1962 – 1986.

Time Spent in Retirement

As per research studies done by the Center for Retirement Research, Boston College, the average retirement age over the last 60 years or so has not changed much. The average amount of years spent in retirement, however, has significantly grown. This growth is over 30%. One probable cause for this is the increase in life expectancy for generations to come, including Generation X, Baby Boomers, and Millennials.

Retirement for Millennials and Generation X retirement, both are expected to last over 20 years, provided they retire around 65. Whereas Baby Boomers too can be expected to spend nearly 20 years in retirement, if they retire by the age of 64, this is five years longer than the period of retirement for the Greatest generation.

As per statistical data:

The Greatest Generation had an estimated retirement period of 14.7 years, assuming they retired around 65 and lived up to 79 years.

Silent Generation had an estimated retirement period of about 18.9 years if the average age of retirement was around 62 years, and life expectancy was around 80 years.

Baby Boomers’ expected estimated retirement period is about 19.5 years if they retired around 64 and lived up to 84 years of age.

Gen X has a retirement period estimated around 20.2 years if they retired at 65 years and lived up to 85 years.

Millennials have an estimated retirement period of 20.9 years if they retired at the age of 65 and lived until the age of 86.

Saving up for retirement

As per current projections and estimates, an individual should plan to invest at least 80% of their present, a.k.a. pre-retirement income/ year, to have a comfortable 20 years of retirement. For instance, if the annual salary of the individual before retirement is around $70,000, they would have to invest about $56,000 in retirement funds to live comfortably and to be able to afford necessities.

But based on the 2019 survey by Transamerica Center for Retirement Studies, the numbers shown are entirely different from the dream. People are not making the right saving decisions, which in turn is affecting their future savings. It shows that Millennials have saved an average of $23,000, while Gen X has retirement savings of approximately $66,000, while Baby Boomers hold about $152,000. These estimates assume $50,000 as the annual income.

What should the savings be ideally?

What should the savings be ideally for Retirement Plan
What should the savings be ideally for Retirement Plan

The following formula calculates an estimate of what the ideal saving should be : 

(Desired Yearly Income for retirement / 4) = (Total investment to be made pre-retirement)

 Something to note is that this income for retirement is excluding the additional retirement income such as Social Security, which enables the individual to be secured financially and allows them to have different hobbies due to the extra income, which is not a part of the equation.

For example, let us say the desired amount of income for the retirement period is around $70,000. To determine the pre-investment amount, divide $70,000 by 4%, which comes to approximately $1,750,000.

When is the right time to start saving for the future?

When savings are involved, it is always best to start saving right away. There is no good time to wait to begin this great deed. If there is a doubt as to how much should be stored right away, subject experts have recommended having a benchmark for every decade of life period, leading up to the period of retirement.

For instance, when a person is 30 years old, they should have an equivalent to their annual salary saved. Following this, their retirement savings should have doubled the annual salary by the time they hit 40 years of age, quadrupled by 50 years of age, and six times the yearly salary by the time they are 60 years old. Essentially, by the time they are around 67 years old, they should have a minimum of eight times their salary saved up for their retirement. This goal setting and benchmark will, without a doubt, help accumulate the necessary fund if worked upon dedicatedly to lead a comfortable retired life.

As the CEO of The Bottom Line Group, Mr. Michael Hammelburger, a financial accountant, always urges people to increase their yearly saving rating, even if that means letting go of a few luxuries in life. He says that people should prioritize their employee contribution retirement account and increase their retirement savings through this account. People tend to forget the tax benefits of these savings and choose other saving options while losing a significant amount of savings in tax over decades. They can increase their contribution up to 10% a year, but they don’t, and later realize that they have spent their salary on unnecessary items that will not add any value to their savings. Instead, this money could have gone into their 401(k) plan.

What does the future of retirement hold in store?

What does the future of retirement plan hold in store
What does the future of retirement hold in store

The future is unpredictable, and everybody should start saving and thinking about the future a bit more seriously, especially when it comes to life post-retirement. Once the individual stops working, what next? Each generation has always had a different answer to this exact question. It is especially wise to be that generation that starts investing in the future.

Thoughts and Worries About Retirement

No doubt, Millennials have had quite some time to think about their retirement. After all, it is now the time for them to earn and hustle. Gen X and the other older generations are the ones that need to worry since they are fast approaching retirement. But the gravity of the situation for older generations in no way undermines the concerns of Millenials. Of course, every generation has its own unique opinions and worries about retirement.

Transamerica Center for Retirement Studies has done a survey highlighting that 48% of the Millennials, which is less than half of the generation, believe that they are aware of how much money they should invest towards retirement. People might expect Baby Boomers to have a slightly better idea than Millennials about how much funds will be needed to sustain their retirement life, as most of them are about to retire if they have not already.

But surprisingly, only 61% of the Boomers know the required savings amount, which is only 13% more than Millennials, who have over 20 years ahead of them to calmly figure out their retirement plan.

  65% of Millennials think they can work up to 65 years and still not have enough money to retire, compared to 58% of Boomers. As far as Gen X is concerned, they do have some time to prepare and plan for their retirement, which is also fast approaching. It is no surprise that over 71% of them are worried about having insufficient savings when they retire at their estimated period.

Work Post-retirement

Over 50% of people of all ages (53% Millennials, 55% Gen X, and 55% Baby Boomers) have plans to continue pursuing their current day job, at least doing it part-time during their retirement period. Yes, it can get boring to sit at home suddenly and relax, after years of working a 9 to 5 job every weekday most of their pre-retirement life. Some want to pursue their part-time jobs to keep themselves from being idle, while others want to earn that extra buck., or some just for the health benefits the company has to offer. 

Dipping into retirement savings

Often when a financial burden arises, such as paying medical bills or paying for kids’ tuition, people usually either take a loan or take out money from their retirement savings. They end up paying taxes and interests on the money taken on loan or cash borrowed, which often burns a hole in their pocket.

22% of Millennials have taken loans.

33% of Gen X have also taken loans that they will have to repay with interests.

As compared to Millennials and Gen X, Baby Boomers are not so much in debt, as only 13% of them have taken loans to meet the sudden money requirement.

Withdrawal savings have also been dipped into by 23% Millennials, 17% Gen X, and 14% of Baby Boomers.

Three main reasons observed as to why Millennials, Gen X, and Boomers take loans or withdraw an amount from their retirement savings are:

1. To pay the residence rent, to avoid being evicted from there.

2. To either pay off their own or the kid’s post-secondary education fee.

3. To pay off medical expenditure for either a family member or themselves.

Most financial planners strongly suggest dipping into retirement money should be the last option, or better, avoided at all costs. A financial planner and founder of LifeManaged, Mr. Thanasi Panagiotakopoulos, states that people are limited to dollar contributions to accounts with a tax-advantage. There will be a massive disruption to the tax-free compounding interest component if people are prematurely withdrawing the money from these funds. He also believes that, despite IRS putting certain hardship withdrawal circumstances to give flexibility if an individual has an emergency and needs funds, it is always better to leave reserves untouched. The longer they cook, the more will be the amount towards the end of the maturity period.

In short, withdrawing money from retirement funds will not only disrupt the compound interest component but also slow down the pace to prepare for retirement, as it is proven to be risky.

Benefits of Social Security Now v/s Later

Benefits of Social Security Now V/s Later
Benefits of Social Security Now v/s Later

The big question that every person from every generation faces, be it Millennial or Gen X, is the luxury to utilize social security benefits post their retirement.

Around 65% of Boomers, who are already retiring or soon to retire, 84% of Generation X, and 80% Millennials speculate that they will not benefit from social security. They are worried about it regardless.

The truth is that future generations will most likely have social security, but it is typical for people to worry about it. A Certified financial planner and founder of The Ways to Wealth, Mr. R.J. Weiss advises not planning on solely relying on social security benefits. He states that despite the availability of social security benefits for Millennials, the amount is uncertain. Past trends have shown that the age when Americans take up social security increases, while the amount has decreased.

It is universal, regardless of which generation they belong to, most people have come to terms with the fact that they will have a more challenging time to attain that financial security than their parents did.

Collect the knowledge, start saving today!

A few useful pointers to remember to start heading in the right direction, a fruitful, happy retirement:

1. Understanding the time horizon.

A person’s current age and the age at which they plan to retire plays to be the foundation to start planning. Understanding where they lie in the time spectrum, say if they are in the 30s majority of their assets could be put in risk investment like stocks.

2.Listing out the retirement needs and how much to spend.

People need to keep in mind and consider where they are going to need the retirement money. For example, they might need the funds for their medical expenses such as supplements, medications, doctor visits for check-ups. They will also need the money for groceries or to purchase basic clothing needs. As per statistics, most people assume they will spend around 70 – 80 % of what they were spending pre-retirement.

3.Assessing the risk tolerance.

Most people are not monetary experts, nor are they professional financial planners or investors. A common man needs to have basic knowledge and have the confidence to invest in a particular fund, post-reading the terms and clauses, and see the risks.

4.The Returns.

An individual should also keep in mind investing in plans that have a significantly better return than others. Spending time and energy in obtaining information on investments that one can afford to make will surely help understand better investment options. This knowledge will help in making smarter investments that will reap better benefits.

No matter what age a person is, it is never too late to start saving, regardless of their generation. Despite realizing late, even if they start saving immediately, it is better than not deciding to reserve for the future. Future for one will be what they plan for it to be and act on it. Educating themselves about the basic requirements and the steps that need to be taken and setting some achievable yearly goals is always a step in the right direction. It will set them apart from not saving even a penny. Numbers are still there when searched for, to understand and save systematically, but saving can start even with one dollar. No amount is too small to start saving. It is also easy to obtain information on anything today, and with a little time and the internet, there is always the choice of learning better ways of investing. Always remember that one day the future will be thankful for the past for the one dollar saved.

If saving for retirement has already started, congratulations on being on the right path! If possible, continue saving, incrementally increase the amount saved. After all, it is better to be saving more than required than not having enough to sustain during retirement. This way, retirement will be a fun ride with loved ones and a time to be relieved of stress. After all, that is where all the savings from hard-earned money will go. 

Start setting goals, planning fun holidays with family and friends, thinking of hobbies to pursue, and most importantly, keeping good health. After all, there is one life to live, so take it easy, stay safe, and remember to save!

Source material and research all courtesy: Choice Mutual