The Future of Retirement

Marshall Rathmell |

Today’s blog post is about the future of retirement for Generations X/Y with high income careers.  Although retirement may seem very far off, for Gen X/Y, these are critical years for making retirement goals and laying plans to achieve them. 

We spend the first 25 years of our lives being supported by others.  We spend the next 40 years being productive while we support ourselves and our children.  We have been taught that after that, we deserve to retire and live a comfortable life without producing.  Many Americans think that 65 is the ideal and expected age of retirement. Unfortunately, achieving a successful retirement (i.e., having enough money to maintain your lifestyle until your death) at or near this age is more difficult than you may think. It is hard for our current crop of retirees, and it will be even more so for Gen X/Y.

Whether or not you believe that Social Security has been mismanaged, the fact is that Social Security  was never designed to solely provide for a person’s retirement. It was designed as a supplement for those unable to produce enough income to support themselves. Further, Social Security is unlikely to survive in its current form indefinitely. According to the Social Security Board of Trustees, if the country continues on its current path then Social Security reserves are projected to deplete by 2038. Continuing taxes would pay 76% of scheduled benefits.

Although multiple proposals for addressing Social Security’s looming demise have been offered, our political parties are not incentivized to come to an agreement that will be the best benefit to all.  The more they both incite fear and accuse the other of being uncooperative, the more we fund their campaigns and support them with our votes.  They are unlikely to make a change until they absolutely have to do so.  People over 50 are more likely to expect Social Security and are more likely to vote against politicians who they feel threaten their Social Security payouts..  Therefore, when the day comes in which politicians are forced to make meaningful decisions regarding Social Security, I believe we are likely to see changes made with the interests of Gen X/Y in mind.

I have heard of 3 likely adjustments. My opinion is that eventually, a combination of all 3 will be applied:

  1. Increasing the age before Social Security kicks in.
  2. Reducing the amount that Social Security provides.
  3. Means testing Social Security so that those who don’t need it won’t get it.

Couple the depletion of Social Security with the reduction in defined benefit plans (e.g., retirement pensions) for Gen X/Y and it becomes clear that Gen X/Y will be much more on our own in providing for our own retirements than previous generations. Our retirement funds will come from the savings we create during our productive years. And our productive years are…right now! Today’s take-away message is one that Gen X/Yers have likely heard ad nauseum, but it is so important that it bears repeating: The more you save and invest prudently during your early working years, the better prepared you are likely to be for retirement. It is easy to get fooled into believing that you can always worry about retirement later when it is more imminent, or when you are older and have a higher income. However, this thinking may lead to some lifestyle mistakes that, once made, are hard to undo.

Lifestyle choices during our productive years are important and can have far-reaching consequences. When we make increases to our lifestyles (e.g., upgrading our vehicles and/or homes) without properly saving for retirement, we double-down on the problem. Why? Two reasons:

  1. We each have a finite number of dollars at our disposal. For some, that number is quite high, but it is still finite. The dollars you spend today to increase your lifestyle cannot be saved for tomorrow’s retirement.
  2. Lifestyle upgrades are fun and satisfying. However, we quickly get used to them and do not want them to be reduced. The problem is that in retirement, we have less money at our disposal. High lifestyle upgrades during the productive years may be hard to surrender in retirement. Retirees often make the mistake of trying to maintain higher lifestyles than they can afford because they got used to a high lifestyle level, perhaps higher than was appropriate, during their productive years.

I am not saying that your lifestyle during your productive years should be joyless. I am saying that one key to successful retirement planning is to balance a comfortable lifestyle today with a comfortable lifestyle down the road.

-Marshall Rathmell-