It is important to understand that our collective fears about retirement are connected to our lack of financial literacy. Fear is an irrational state that forces us to make poor choices or it can freeze us into inaction. When it comes to retirement advice, the greatest fear we have is running out of money. In fact, nearly half of Americans have this persistent fear they will not have enough money for retirement. Let’s be clear about something: this fear is irrational in the sense that the vast majority of Americans will receive Social Security benefits for life. The question now becomes: does this fear have a basis in reality. The simple answer is yes. While the vast majority of Americans will not run out of money, many will not have the retirement they envisioned. Depending on when you retire, you may not receive full retirement benefits. Also, the fact we are living longer, coupled with inflation, means that you need to plan for your retirement now.
Five Factors that Contribute to Retirement Fears
Let’s look at five factors that contribute to our retirement fears. Although each of these factors, when examined in isolation, are not terribly problematic, they become a source of serious concern when you look at their collective impact. The five factors contributing to retirement uncertainty include:
- Longer life spans.
- Running out of money.
- Volatile stock markets.
- Potential default of Social Security/pensions.
- Rising cost of healthcare.
One of the benefits of modern medicine is that our life expectancy continues to rise. In 2020, life expectancy was 77.8 years. Although this number is slightly less than 2019 (78.8 years), due to the COVID-19 pandemic, life expectancy has been going up for decades.1 Although an increase in life expectancy is a wonderful thing, it also means that we have to plan for a longer retirement. This leads to the fear of not having enough money to sustain a comfortable retirement. This is why I keep telling people that planning for retirement must be a priority from a young age. A longer life span means that inflation will eventually eat away at the purchasing power of your savings or investments.
Another reason retirement planning is critical is the type of investments you have. If you are invested in the traditional 60/40 portfolio, you might not be maximizing your potential return. Although this mix of stocks and bonds had solid returns in the past, it is expected that the 60/40 portfolio will return a paltry 3.5% on an annualized basis over the next 10 years.2 This is why it is important to carefully plan your retirement investment so you can avoid the potential pitfalls of the 60/40 portfolio. You need to sit down with a qualified financial planner who has experience with alternative investment strategies.
Other factors that contribute to retirement fears include Social Security and pensions. This is not widely known, but under current law, the Social Security Trust Fund will become depleted by 2034 unless Congress acts to change the law.3 Also, if you choose to retire before the full retirement age of 66 years and 2 months, you will not receive full retirement benefits. If you are relying on your pension to carry you through retirement, you need to consider that almost two-thirds of pension funds are considering dropping guaranteed benefits to new workers within the next five years.4 What this means is that the onus for retirement rests upon us to prepare. Planning for retirement is now more urgent than ever before.
The Importance of Financial Literacy
Financial literacy today is more important than ever before. When you consider that we are living longer; an uncertain Social Security and pension system; as well as a potentially broken 60/40 investment strategy, you need to protect yourself. We all need to begin asking the important questions: will we have enough to retire? Will my current investments carry me through retirement? Do I have a 401(k) plan and how is it invested? You need to educate yourself by becoming more financially literate. I urge you to read my Wall Street best-selling book, Redefining Financial Literacy, which offers you an in-depth analysis of how you can plan for retirement without the fear and uncertainty that freezes people into inaction.
1. Laurel Wamsley, ”American Life Expactancy Dropped by a Full Year in 1st Half of 2019,” npr.org, February 18, 2021. https://www.npr.org/2021/02/18/968791431/american-life-expectancy-dropped-by-a-full-year-in-the-first-half-of-2020
2. Viewpoint Investment Partners, ”Death to the 60/40! Long live the 60/40!” viewpointinvestment.ca, November 17, 2020. https://viewpointinvestment.ca/2020/11/17/death-to-the-60-40/
3. Congressional Research Service, ”Social Security: What Would Happen if the Trust Funds Ran Out?” fas.org, July 19, 2020. https://fas.org/sgp/crs/misc/RL33514.pdf
4. Nathan Bomey, “’It’s Really Over’: Corporate Pensions Head for Extinction as Nature of Retirement Plans Changes,” usatoday.com, December 10, 2019. https://www.usatoday.com/story/money/2019/12/10/corporate-pensions-defined-benefit-mercer-report/2618501001/