Charles and Laura, both 67, recently retired and decided to relocate from Northern Virginia to the Shenandoah Valley. They enjoy the slower pace, quieter neighborhoods, and natural beauty of the serene mountains.
Their monthly income includes total gross Social Security benefits of $2,082 ($1,786 after Medicare Parts A, B, and D deductions). Charles and Laura also both collect small pensions, totaling $257 per month. Last year, their 2018 gross income was $30,000.
When moving, they downsized their belongings, paying a mover to transport the bare minimum, including their clothes, books, and bicycles. If things get tight, they plan to get part-time jobs. They feel fulfilled and blessed, and consider themselves rich in love, life, and friendships.
In another example, Jared and Rachel, both in their early 60’s, were mentally ready for retirement, but have been wary to take the plunge. They have pushed it off for a few years with an attitude that it will be “one year more.” When they retire, they want to travel and live comfortably. They have been concerned about the escalating costs of health care, the amount of inflation that might occur, and the fact that they will never make the money that they are making now. They want to make sure that they are 100% comfortable with their financial situation before they retire.
If either of these examples are what retirement looks like now, will it look similar or very different for our adult children’s generation?
Retirement in the Future
A new report by the nonpartisan Urban Institute think tank titled, “Nine Charts about the Future of Retirement,” presents a fresh perspective about the prospects for retirement security for younger generations. Although the Urban Institute report isn’t entirely optimistic about the retirement outlook for future retirees, it highlights several positive trends.
Note: The Urban Institute’s data is broken down into the following 10-year birth cohorts:
Pre-boomers: 1936 – 1945
Early boomers: 1946 – 1955
Late boomers: 1956 – 1955
Gen Xers: 1956 – 1975
Xennials: 1976 – 1985
These are some of the projections from the report. As you can see, a lot of what is projected depends on the future of Social Security.
1. Retirement incomes will continue to rise
Despite widespread concern that workers are not saving enough for retirement, retirement incomes will continue to increase over the next four decades, as long as policymakers do not cut Social Security benefits.
2. Women’s increased earnings will power retirement income growth
Higher lifetime earnings for women mean more Social Security and larger pensions and retirement account balances. It also means the ability to save more outside of retirement accounts.
3. Gen Xers and Xennials should be able to meet pre-retirement living standards, as long as they don’t cut Social Security.
A common goal of retirement planning is to maintain preretirement living standards (enough income to replace 75% of preretirement earnings is often used as an adequacy rule of thumb because spending typically declines in retirement). Urban Institute predicts that almost 70% of Gen Xers and Xennials will have adequate resources to maintain their living standards in retirement, as long as policymakers do not cut Social Security benefits.
With Social Security payments now exceeding payroll tax revenues, the system’s trustees project that the Social Security trust funds will run out in 2035, unless federal policymakers raise revenues or cut benefits to close the financing gap.
If Social Security benefits are cut, 38% of Gen Xers and 40% of Xennials will be unable to maintain 75% of their preretirement earnings at age 70. Pre-boomers and early boomers would feel these cuts at older ages because they will turn 70 before the Social Security trust funds are projected to run out.
4. Social Security Cuts Will Hit Low-Income Retirees the Hardest
As you can imagine, Social Security replaces a larger share of lifetime earnings for retirees with limited lifetime earnings than for those who earned more. The study projects that fewer than 33% of Xennials in the bottom fifth of the income distribution will have an employer-sponsored pension or retirement account when they retire. So, future Social Security cuts could hit these and other low-income retirees especially hard.
5. Gen Xers and Xennials will pay more taxes in retirement
At age 70, Gen Xers and Xennials are projected to allot 18% of their income to taxes, compared with 14% for pre-boomers. These payments include federal and state income taxes, Medicare surtaxes, and payroll taxes for those still working. Effective tax rates will increase over time because the income thresholds for taxing Social Security and Medicare surtaxes are not indexed for inflation.
Are you Within 10-15 Years of Retirement? Better Start Planning Now!
Whether your retirement is coming up soon or many years away, it is important to protect your hard work and your golden years with effective retirement planning and long-term care financial planning.
Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care financial advisor through my financial services company, Lifecare Financial Services, LLC, which has been in business since 2006. Lifecare Financial Services works often in connection with other top retirement and long-term care financial advisors around the country. As a Certified Elder Law Attorney and a retirement planner, my goal is first and foremost to help you secure your financial future and well-being. A secondary goal for some of clients is to also leave an inheritance for their children and/or grandchildren.
Retirement planners, such as myself, generally work with people ages 55 and older, who are within 10-15 years or so of their desired retirement age. We know when you can afford to retire, how to coordinate your assets, how much you can withdraw from retirement savings (and from which accounts), how to manage expenses, and how to help you plan for catastrophic expenses such as long-term care. Learn more here.
Plan in Advance for Peace of Mind
We here at the Farr Law Firm have strategies in place to help all types of people at all ages to plan for themselves and their loved ones. By planning in advance, each person can retain the assets it has taken a lifetime to accumulate and the peace of mind that their family’s needs will be adequately and properly addressed. Please contact us to make an appointment for an initial consultation:
Fairfax Retirement Planning: 703-691-1888
Fredericksburg Retirement Planning: 540-479-1435
Rockville Retirement Planning: 301-519-8041
DC Retirement Planning: 202-587-2797
About Evan H Farr, CELA, CAP
