A recent FPA blog post focused on the changes in Social Security over the last 50 years. I thought I’d take things a step further and review how planning for retirement as a whole has changed over the decades. When talking to clients, I like to use my grandparents as an example of how different — and much more challenging — it is now to prepare for a financially sound life after retirement.
Grandma and Wimpy (he was my step-grandfather) both worked most of their lives at the ammunition plant in Lake City. They both retired at age 65, as planned, and immediately began drawing Social Security. They also each had a defined benefit pension plan from the ammunition plant that started upon retirement.
When they turned age 65, they not only qualified for full Social Security benefits but also for Medicare. They purchased the usual Medicare supplement health insurance policy to fill in the gaps not covered by Medicare.
Things were simple. They knew how much money they needed to live on. Each month when they went to the mailbox (yes they went to the mailbox for checks) and there were four checks waiting, two from Social Security and two from the pension plan.
Each of these checks were guaranteed for the rest of their lives and adjusted for inflation. Grandma and Wimpy lived a wonderful retirement into their mid-80’s, well beyond their life expectancy at the time.
How things have changed over the years! When I retire I won’t be eligible for full Social Security benefits at age 65 but rather at age 67 or beyond. I also am likely to pay more income tax on my Social Security benefits, thus reducing those benefits. The amount of income on which I pay Social Security tax has increased over the years, which is another reduction in benefits.
My employer does not offer a Defined Benefit pension plan so, like many Americans, I’m responsible for saving for that portion of my retirement on my own through IRAs or a 401(k) plan.
I’m likely to pay much more for health insurance as the inflation rate for health care costs is much higher than the average inflation rate. It’s likely I’ll be responsible for a greater share of my health care costs as well. My life expectancy is longer than my grandparents, leaving more years for which to plan and pay. Many Americans plan to retire earlier than age 65, making the challenge even greater.
While it is certainly nice to have a longer life expectancy than previous generations, this along with other factors makes planning for retirement much different. I won’t open my mailbox to find four checks waiting but rather two—one for me and one for my wife-- and those checks won’t come until a few years after age 65. I am likely to pay more for health care, have a higher tax bill and have to plan for more years in retirement. These factors present a challenge to those currently preparing for retirement.
Are you ready? I better get back to work!
Chris Walden, CFP®, is an advisor with Heartland Capital Advisors, LC, a registered investment advisor in Independence.
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