Whether your vision of retirement is raising the anchor on a sailboat, keeping busy and paying the bills with full or partial employment, or something in between, the retirement landscape is drastically changing.
Each generation, from boomers and Gen X to millennials and Gen Z, faces different prospects on how much money they’ll need, where their funds will come from and the best strategies to make sure they can live the life they hope for in old age.
“Assumptions that we started out with in our late teens and 20s could very well change and evolve in line with the landscape,” said Catherine Collinson, CEO and president of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies. “So one of the big things is to anticipate the unexpected. Knowing that a savings journey could last 50 years, there will be adjustments and course corrections along the way.”
What people across generations do have in common is that most aren’t as prepared as they should be. The Center for Retirement Research at Boston College found that at the rate they’re saving, around half of working-age households won’t be able to maintain their current living standard in retirement.
Populations in Flux
The U.S. population is getting grayer, with adults 65 and older expected to outnumber children under 18 for the first time in U.S. history by 2034, according to Census Bureau projections.
Meanwhile, younger Americans surveyed by the TransAmerica Institute are expecting to live longer and retire earlier. Gen Z, many of whom expect to be centenarians, could have 30 years or more of retirement living they need to save for.
Because of such long-term projections, the classic rule of thumb for what we need to save — $1 million is a widely suggested goal — likely won’t hold true into the future. Inflation dictates that $1 million saved today will not be worth a million down the road. At the Federal Reserve’s target inflation rate of 2%, in 15 years $1 million will be worth around just $603,000.
To know how much you’ll need, whether you’re 20 or 60, Luke T. Sturges, CEO and founder of Northwestern Mutual’s Sturges Financial Group, said it’s best to ignore rules of thumb.
“The far better way to do it is just to look at what the lifestyle is that you want or expect, and then reverse engineer how much capital we’ll need from there,” he said. “Dig into a financial plan with a professional. If you systematically pay yourself first and live on what’s left over, then achieving a retirement is very doable for most people.”
Casting a Wider Safety Net
The sources of income that will fund each generation’s retirement are also in flux. The primary sources for current retirees are Social Security, a pension or 401(k) and personal savings, with almost half of seniors today counting on Social Security for half or more of their income. With built-in annual cost-of-living increases, Social Security helps keep an estimated 10 million older Americans above the poverty line, according to the Center on Budget and Policy Priorities.
Because of long-term funding issues, however, Social Security payments are expected to be cut by nearly one-quarter beginning in 2034. Without effective action from Congress to reform the program, it could be a less reliable safety net for future generations, pushing them to diversify and put more focus on other income sources like annuities, stocks or part-time work.
“It’s up to everyone to keep tabs on what those reforms might be and how they are personally affected by them,” Collinson said. “Most people likely will be affected in one way or another and will need to adjust financial plans for retirement accordingly.”
Despite these challenges, Collinson sees many reasons for optimism. The Secure 2.0 Act, a sweeping bipartisan bill passed by Congress in 2022, contains extensive measures to strengthen the retirement system, with dozens of provisions aimed at employers large and small and people across generations in order to make saving for their futures easier and more accessible.
Paying for Our Health
The cost of healthcare is rising for everyone, but older people with more chronic health conditions tend to spend considerably more. According to the Fidelity Retiree Health Care Cost Estimate, the average 65-year-old retired couple currently needs around $315,000 to cover healthcare expenses during retirement.
Medicare premiums and deductibles are likely to keep rising, and at a rate that outpaces inflation. The Centers for Medicare and Medicaid Services projects that national health spending will grow an average of 5.1% per year to reach nearly $6.8 trillion by 2030.
As the population gets grayer, more adults are also expected to need some form of long-term care — an often enormous expense that many aren’t prepared for. In 2021, the national average cost for a private room in a nursing home facility was $108,405, and in-home health aide was $61,776. Medicaid can cover some of these costs, but it’s typically a limited and last-resort option.
To help meet these future needs, some states are now exploring state-sponsored long-term care insurance programs. A mandatory payroll tax is set to take effect in Washington state next year, with California and Minnesota considering program options as well.
The Roof Over Our Heads
Homeownership for retirees has traditionally been high, hitting a peak of 81% in 2012. That number has slightly declined, though, with the downward trend expected to continue.
More seniors are carrying mortgage debt into their retirement, and more have second mortgages, according to the Harvard Joint Center for Housing Studies. For retirees who rent, the situation is more volatile. Rental costs are less stable, and the supply of affordable rental housing available to seniors is dwindling. Harvard JCHS reported that the number of very low-income seniors without affordable housing could increase by 2.4 million from 2018 to 2038.
In addition to these standard expenses, retirees — especially those who will be living longer — should ideally have extra funds to cover unexpected surprises like a pricey home repair, the loss of a spouse or a child needing extra financial support, not to mention budgeting for the travel, entertainment and hobbies that they’re looking forward to enjoying.
So what should each generation be anticipating for their golden years? Read on for our experts’ predictions and advice.
Now in their late 50s, 60s and 70s, most in the boomer generation are well within retirement age, though nearly half expect to work past age 70 or don’t plan to retire, according to the Transamerica Institute, both for financial and healthy aging reasons. Forty-one percent of boomers say they’ll rely on Social Security as their primary source of retirement income — and they may be the last of current generations to be able to do so.
Given that boomers are in the late stages of their saving journey, Sturges said their future focus should be not so much on saving but on figuring out how to best spend what they have.
“How do they take all of those assets they’ve accumulated and turn them into income?” Sturges said. “How do you intentionally do it, and how do you emotionally do it? That’s a big deal. It’s about creating a plan and helping boomers shift from accumulation to de-accumulation.”
Gen X entered the workforce when 401(k) plans were in their infancy, without many options or much guidance for how to use them well. Now, approaching retirement age themselves, Gen X is faced with concerns like college costs for their adult children and the declining health of their parents and has struggled to keep up with retirement goals. A recent report from the National Institute on Retirement Security found the typical Gen X household only has $40,000 saved for retirement, with the bottom half of earners only saving a few thousand dollars.
Sturges advises Gen X to set limits and “have courageous conversations” with their adult kids about how much they can still support them, as well as carefully consider other midlife temptations like buying a vacation property.
“We live in a culture of ‘keeping up with the Joneses,’ and thinking perhaps we deserve it, but how far do you really want to be extended?” he said. “Some of the decisions you make right now really have an impact on your ability to save in what are really critical years.”
Collinson also encourages Gen Xers to take advantage of catch-up contributions available to people 50 and older that allow contributions to a retirement account or IRA above standard limits.
Millennials recently surpassed their boomer parents as the largest generation and are potentially faced with tough competing financial demands: purchasing homes, raising children, paying off student loans and other debt, and caring for aging parents. According to the Transamerica Institute, 78% are saving for retirement but are nonetheless falling behind.
For millennials who struggled through the Great Recession and are a bit shell-shocked by COVID-19, Sturges advises them not to be discouraged. “They might have such tremendous recency bias to incredible volatility that they’re scared. But it’s our job as financial planners to remind them that volatility creates tremendous opportunity. We’ve still got 25 years of savings habits that we can affect if you’re a millennial.”
One provision of Secure 2.0 that Collinson said is tailor-made to millennials torn between student loan repayment and saving for retirement is one that allows employers to match student loan payments in a retirement account. “It’s a really elegant approach, and it’s exciting because it’s helping them get started with retirement savings in a way that they can enjoy the long-term growth of those savings,” she said.
Having entered the workforce shortly before the COVID-19 pandemic, the youngest generation of working age has been subject to extreme job market volatility. More than half surveyed by the Transamerica Institute said they experienced job setbacks, ranging from layoffs to furloughs or reduced hours. Thirty percent work two or more jobs and 57% have a side hustle.
At the same time, they’re the most optimistic of any generation that they’ll have enough money to retire, according to a study by Northwestern Mutual, and expect to do so by age 60. With greater access to 401(k) plans than any previous generation, they’ve started saving early. Nearly two-thirds are saving in a retirement fund, beginning at a median age of 19, according to Transamerica.
With their strong streaks of entrepreneurship and multiple sources of income, Sturges said the key for Gen Z is being aware of self-employment savings options available to them like IRAs, SEP IRAs and solo 401(k) plans.
No matter your age or situation, Sturges said the key to security is thorough planning, ideally with an advisor who’s the right fit. “There’s always intentionality behind our decisions that can lead to better outcomes,” he said. “The sooner you can start, the better – but honestly, it’s never too late.”
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