THE NEW RULES OF RETIREMENT

As the national debate over Social Security illustrates, retirement in the 21st century won't look like our parents' or grandparents' retirement. New rules are coming into play, and the sooner you understand those rules, the more comfortable your retirement will be.

You'll live longer. Average life expectancy "how long one lives from birth to death" rose to 77.6 years (80.1 years for women, 74.8 for men) for people born in the United States in 2003, according to the latest figures from the Centers for Disease Control and Prevention.

Longevity "the average number of years of life expectancy based on your current age" is also increasing. According to the National Center for Health Statistics, a 65-year-old person can expect to live another 18 years, to age 83 (20 years for women, 17 for men). And each year you live beyond age 65, longevity stretches a little bit more.

This increased life expectancy has profound implications for retirement, and more than any single factor is changing the rules of retirement.

Retirement is a whole new stage of life. Not all that long ago, people worked late into their life, retired to a rocking chair for a few years, and died. Today, not only are people living longer, many are retiring earlier. Retirement has become a stage of life that can easily last 20 to 30 years or more! What you "envision" for your retirement and how to pay for it is something you must plan and work for.

A secure retirement is on your dime. Like it or not, most of us will have to fund an ever-increasing portion of our retirement or try to scrape by primarily on Social Security.

Employer-paid pension plans that pay out defined monthly benefits based on salary and years of service are going the way of the dodo bird. Of the 112,000 corporate pension plans in 1985, only 32,000 are left today, according to a U.S. News & World Report article[January 24,2005]. Most of those pension plans have been replaced by retirement plans such as 401(k)s funded primarily by employees.

Social Security will be there, but Social Security is not likely to go away, but it is very likely to change. Most financial planners have been advising their clients for some time not to base much of their retirement plans on income from Social Security, which was never designed to be anything more than a safety net. Yet for 22 percent of people over age 65 today, Social Security is their sole source of retirement income, according to the Social Security Administration. And it provides over 50 percent of retirement income for two-thirds of the elderly.

You'll need to work in retirement. That may sound like an oxymoron, but even current retirees are returning to the workforce. Sometimes it's for the money, but often it's because retirees are looking for emotional and intellectual stimulation they're not finding in retirement. A good approach is to "phase" into retirement by reducing full-time work to part-time or seasonal work, or even change careers.

Stretching out retirement funds is as important as accumulating them. Because people live longer in retirement, they need to be more careful in how they keep their retirement portfolio invested and at what rate they withdraw funds from the portfolio. Ground-breaking research in the financial planning profession suggests limiting annual withdrawals to four to five percent of a retirement portfolio's value - perhaps a bit more if you follow certain rules and review your portfolio regularly. Your financial planner can help you here.

Health care costs could kill you. A huge but often unrecognized cost of retirement is health care. The Employee Benefits Research Institute says that medical costs for retirees is actually five times higher than what near-retirees believe they will be. Meanwhile, employer-funded retiree health plans are disappearing or raising costs for their retirees, and Medicare pays only roughly 55 percent of the average retiree's health care costs. Future retirees need to think carefully about medical insurance for retirement and save more for rising out-of-pocket expenses.

You need to prepare for long-term care. With people living longer, chances increase that you'll need long-term care at some point [July 2004  Observer], either at home, in a nursing home, or assisted-living facility. That takes a lot of money you may not have or don't want to drain from retirement savings. Your retirement plan should consider long-term care insurance.

Edited and revised by Charles P. Buck CFP™.  Produced by the Minnesota Chapter Financial Planning Association.