What Does Retirement Income Actually Look Like for Future Generations — Will It Work?

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There was a time when planning for retirement meant having lots of children. Later, millions of workers depended on private pensions for financial security in old age. Then in 1978, Congress added an obscure provision to the Internal Revenue Code called Section 401(k), which allowed employees to avoid being taxed on deferred compensation. More than 40 years later, employer-sponsored plans account for most of the country’s retirement savings. 

But what does the future hold for young people who are still decades away from their last workday?

“It’s going to be hard to tell what retirement will look like for millennials and Gen Z until the effects of the Great Resignation play out,” said Terry Turner, a senior writer and researcher at RetireGuide. “It’s empowering a lot of young workers in a way we haven’t seen in generations — probably since the end of World War II — certainly like nothing in my lifetime.” 

The last two years have altered the course of retirement planning and saving forever. Here’s what the experts think today’s young people might be in for when they’re not so young anymore. 

The Big Mistake Is Lumping Gen Z and Millennials Together

Pundits often talk about “millennials and Gen Z” as a collective. But the oldest millennials are now 40 years old and the youngest Gen Zers are still in elementary school. Their working years will barely overlap — and what different years they’ll have been. 

“Retirement planning for millennials is certainly going to be a lot different than for Gen Z, simply because of the formative years of their early careers,” Turner said. “Millennials came of age in the time of 9/11 and the Great Recession, and the economic data and surveys out there show that they have had a much harder time getting ahead. Gen Z is hitting the workforce during the Great Resignation when workers have new leverage to demand better pay, benefits, and working conditions. Bloomberg reported in October that wealth for Gen Z has increased by as much as 50% during the pandemic. These are two very different experiences of joining the workforce, and these experiences can and likely will shape people’s long-term views of careers and how and when they may start saving for retirement.” 

A Version of the Old Pension Model Could Stage a Comeback

Like vinyl records and bell bottoms, it’s not unheard of for yesteryear financial trends to come back into vogue generations later — and retirement planning decades from now might very well include themes that fell out of favor decades ago.

“From the research I’ve seen over the past couple of years during the pandemic, it looks like both millennials and Gen Z workers will be demanding more guaranteed income in retirement,” Turner said. “They want something like older baby boomers had with private-sector pensions. Research from the Alliance for Lifetime Income has been tracking millennials’ growing interest in some sort of guaranteed retirement income — pensions or private annuities — beyond Social Security. That tells me you have a lot of millennials looking for paycheck security, something that’s been shaky since the Great Recession.” 

The idea is already gaining traction. 

“We are just on the precipice of seeing the effects of the 401k vs a traditional pension on actual retirement,” said Michael Clark, managing director at River and Mercantile. “We’re already starting to see innovation in providing lifetime income from retirement savings, and that trend will continue in the coming decades as, one, more and more companies look for lifetime income solutions to provide their employees, two, as service providers develop products, and three, as Congress passes laws that encourage both one and two.” 

Retirement Might Go Back to Being a Communal Affair

Another trend from a bygone era that’s gaining favor among younger people today is the pursuit of financial security through group living.

“We are finding that millennials’ flexible definition of family extends into their plans for living arrangements,” said Brad Biren of IQMOP.com, a tax and elder law attorney who specializes in crisis Medicaid planning. “Many of them prefer to live together in a duplex or multiple-family living dwellings more than living alone.”

That trend might follow them into retirement, as it did for their grandparents and great-grandparents.

“Unless the nursing facility funding system in our country is drastically overhauled, then we will continue to see an uptick in tenants in common,” Biren said, referring to a living arrangement where ownership transfers from one resident to another after death. “Think Golden Girls, but Blanche doesn’t own the whole house.” 

Today’s Low Bond Yields Play Could Be Tomorrow’s Retirement Wildcard

The vehicles that people use to invest and save for retirement probably won’t change — but their returns certainly have, and that means strategies will have to change, too.

“Likely, the core asset classes of equities, bonds, and annuities will remain key parts of a person’s retirement portfolio,” said Shawn Plummer, CEO of The Annuity Expert. “What can change is inflation and bond yields. Rising inflation has made it more uncertain for retirees who worry about running out of money and inflation will likely continue to rise due to long-term economic growth. Bond yields have also been low, which was unprecedented 20 years ago, and they may continue to be low as policymakers try to push the economy. This also makes it harder for retirees to generate enough yield while safeguarding their capital to beat inflation.”

Today’s Young People Will Probably Surrender More to Taxation

The elephant in the room is that it’s essentially not possible for the country to maintain its standard of living without generating more revenue for the government.

“Younger generations will likely have to contend with higher income taxes than current retirees,” said Brandon Renfro of Belonging Wealth Management. “Under current law, the Tax Cuts and Jobs Act will sunset at the end of 2025, which will push tax rates back up unless Congress takes deliberate action to prevent it. Then, there’s the longer-term issue of the national budget to consider. The last time we ran a federal surplus was over 20 years ago. Couple that with the fact that even with the sunset of the TCJA, tax rates will still be very low by historical standards. It is far from unreasonable to think tax rates will go up over the next several decades.”

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Then There’s the Question of Social Security

At the heart of all retirement planning is Social Security, the bedrock of America’s social safety net — and a program whose future is far from certain.

“Social Security is likely to change for people who are still decades away from retirement,” Renfro said. “It’s still unknown what that change will look like, and there are a lot of options. Possible examples include reduced benefits, waiting longer to be eligible for benefits, a higher FICA tax rate, an increased taxable wage base, or an increase on the taxation of benefits.” Either way, something’s got to give — the Social Security Administration states plainly that by 2035, “taxes will be enough to pay for only 75 percent of scheduled benefits.”

That’s a frightening prospect, but most think the country will deem the program to be worth saving.

“Even though there is a lot of analysis around the long-term viability of Social Security, given the size and dependence of that social program, it’s hard to see a scenario where Congress allows that safety net to disappear in its entirety,” Clark said.

In the end, those who save diligently and consistently will always have a leg up on those who do not. 

“Regardless of what changes are coming, you can soften any negative effects by simply saving on a consistent basis,” Renfro said. “If you still have multiple decades between you and retirement then time is still your friend and you can accumulate a healthy savings balance.” 

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