Editor’s note: This the first in a four-part series. The original appears in its entirety as the cover story of the Winter 2023 edition of Plan Consultant magazine. The digital edition of the Winter issue is available here. However, access to Plan Consultant is restricted to ASPPA members, so you’ll need to be logged in.
My elder daughter’s wedding cake had several layers: chocolate, tiramisu, tres leches. And like her bridal confection, the various groups of retirement savers have special flavors that make them unique. Understanding those layers can be a key to better empowering them to save and financially prepare for retirement bliss, or at least security.
Setting the Table
“We have gone from a Baby Boom in the 1950s to a baby bust today. We are now living with something like an inverted population pyramid — with an unusual number of old people relative to young workers,” writes October Three’s Michael Barry.
Compounding that trend is not only increasing longevity, but also the awareness that living a long life is more common. In “Longevity and the New Journey of Retirement,” a study of more than 11,000 North American adults that examined the changing definition of retirement, Edward Jones and Age Wave found that 69% of respondents said they want to live to age 100 — but only if they are living well. They further found that retirees now say the ideal length of retirement is 29 years.
When Retirement Begins. The researchers found blurred lines concerning when retirement begins:
- to 34%, it’s when full-time work stops;
- to 22%, it’s when they start receiving Social Security and/or a pension;
- to 17%, it starts when one leaves a job/career;
- to 17%, it’s when they achieve financial independence; and
- to 10%, it starts when one reaches a certain age.
Interestingly, the time2play blog in a March 2022 survey of 1,000 Baby Boomers and Millennials found that the younger generation evinces slightly more optimism about when retirement will take place: 16% of the Baby Boomers — presumably, the younger ones who are not yet that age — believe that they will be able to retire at age 62, while 20% of Millennials believe they can by age 65. Equal percentages of each generation — 15% — expect to be able to by age 70.
And older generations may share their younger counterparts’ positivity about retirement timing. EBRI reveals in “Staying Optimistic: Older Americans’ Retirement Expectations Remain Uninterrupted Despite COVID-19 Impact” that older American adults did not adjust their retirement expectations significantly due to the Pandemic — including the ages for retirement and claiming Social Security benefits.
DB-DC Shift. Another important factor is the shift in retirement financing from being predominantly based on defined benefit plans to a stronger reliance on defined contribution plans.
The way retirement is financed has shown a “massive shift,” say Robert Siliciano and Gal Wettstein, respectively a research economist and a senior research economist with the Center for Retirement Research at Boston College, in “Can the Drawdown Patterns of Earlier Cohorts Help Predict Boomers’ Behavior?” They cite data showing that at least 60% of households of those born in the 1920s and early 1930s had a DB plan, while only 10% or fewer of households whose members were born in the early 1960s do.
DC plans can increase responsibility for account holders; for instance, they are responsible for deciding how to handle drawing down the balance. And they can incorporate risk, which can vary depending on how the assets are invested.
Still, some argue the shift from DB plans to DC plans also includes good news: for instance, DC plans are not all risk, some observe, and can make it possible for retirees to amass retirement savings beyond that of their parents.
The bottom line is that these longer-term trends make the need for retirement planning more acute and the involvement of professionals much more important.
Next: A look at generations
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