(Sam Swenson, CFA, CPA)
In an environment of rising interest rates, still high inflation and a declining stock market, pre-retirees and retirees alike are very concerned about making ends meet in retirement. Realistically, these concerns are valid, which makes it all the more useful to understand what retirement income might look like over the next 10 years. Rather than relying solely on Social Security, it is likely that a large proportion of retirees will enjoy active income at the end of their primary career.
Given economic trends and ever-changing demographics, there are good reasons to believe that retirement income will have a different composition in the future.
The reality of social security
Even though Social Security acts as a reliable source of income for most retirees, chances are it won’t be enough to cover all expenses in retirement. On the positive side, Social Security benefits increase through cost-of-living adjustments (COLAs), meaning they are one of the few guaranteed, inflation-adjusted income streams on which retirees can count. That’s why getting the most out of Social Security – by working longer or earning more in your career – is absolutely essential.
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There are also questions about the future of the Social Security program and the possibility that there will be a reduction in benefits down the line. This is a result of the Social Security reserve dwindling, with the SSA Trust Fund reserve expected to run out in 2035. That said, the likelihood of Social Security disappearing entirely is low at this point. More likely, those waiting until the mid-2030s to retire could see benefits paid out at just 80% of their primary insurance amount.
All this to say that the people most likely to succeed in retirement will have accumulated enough years of work at a high enough rate of pay to secure a sustainable stream of income well into their 80s and 90s.
Personal savings will matter more
As corporate pension plans have gradually gone out of fashion over the past few decades, more reliance has been placed on personal savings when it comes to generating retirement income. This means that maximizing 401(k)s and IRAs will pay huge dividends (literally and figuratively) when it comes to retirement in the 2030s. Those with large personal savings in their name will be in a strong position to supplement social security and meet ever-increasing expenses.
Unfortunately, stock market returns are variable, which means we have no idea how personal portfolios will evolve over the next decade. But we know that those who maximize contributions to their retirement accounts as soon as they can will be better able to tolerate a low-return environment.
Active income will be more common
With the rise of remote work and the gig economy, earning even a small active income has never been easier. In real terms, even earning an extra $10,000 to $20,000 a year in retirement can make a huge difference to most spending plans. Since it no longer requires long commutes or many hours on your feet, earning a small income can even be an attractive way to spend a few hours a day in retirement. Additionally, as research has found, those who remain intellectually active in retirement tend to report higher levels of happiness and also tend to live longer on average.
Another part of this equation is that life has become considerably more expensive than it was a few years ago. These costs will continue to rise. But earning active income even after retiring from your primary career can be a major method of defense, especially when paired with Social Security and a few investment accounts.
Take control of your retirement
The main point to remember is that the possibility of a fully funded retirement will depend on savers and their individual behavior. Social Security will still be a good option to maintain an income floor, but the rest of the retirement income will have to be personally earned. Gone are the days when a company pension and social security would be enough to support a retired family. The stakes are much higher now and will be for the foreseeable future, but workers and savers can still expect quality results with enough effort and advance planning.
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