The maximum age has increased rapidly over the past century. Today, the average lifespan is 78.8, according to the Center for Disease Control, and that number is likely to rise. A greater awareness of healthy lifestyle choices has encouraged people to exercise more and cut back on dangerous habits, like smoking. Coupled with improved medical care, these changes have created an environment where people remain alive and well longer than ever before. While this offers obvious benefits for people who want to spend more time with family in their twilight years, it also introduces unexplored economic issues.
The high cost of high ages
Retirement is expensive, and spending more time in old age compounds these costs. The retirement age was standardized at 65 years old with the introduction of the Social Security system in 1935, according to the Social Security Administration. Since then, lifespans have gone up, but the expectation that work ends after 65 has not. This creates problems for everyone who saves for retirement using old standards for what’s necessary. Even high-net worth individuals who have adequately prepared for retirement may find their financial legacy impacted by unexpected costs that arise after they leave the workforce.
The increase in lifespan does have some benefits. CNBC notes that it will allow people to live life at a more leisurely pace and unseat the traditional model of staying at a single job for years on end. Already, people are switching jobs much more often than their parents did, which makes life a more cyclical journey rather than a straight line. Retirement planning needs to adjust in order to accommodate this lifestyle, and financial professionals should begin conversations with clients that set realistic expectations about time spent in the workforce and money needed in retirement.
A difficult conversation
CNBC notes that people are unprepared to learn they will live past 100 years of age, and explains that it can be difficult to have a conversation that adequately explains how clients’ lives will differ from their parents. People who expect to retire at 65 may be upset to learn that they will need to work later in life to adequately prepare for a prolonged retirement.
Generation X, which encompasses people currently between the ages of 35 and 50, will be particularly affected by the shift. Not only will many of these members live unexpectedly long lives, but they also saw their finances decimated by the financial crisis. According to The Street, the recession swallowed up about a quarter of the generation’s savings. Now the group’s top fear is a lack of retirement savings, according to a Northwestern Mutual survey, and many will need to work later in life than they expected.
Where to focus
While amassing together enough money to survive a lengthy retirement will be a large concern for many members of Generation X and younger groups to follow, financial planners need to focus on a more pressing concern facing their high net worth clients. These individuals are unlikely to outlive their savings, but will want to leave the maximum amount possible to their children and family.
A longer-than-expected retirement will bring increased financial demands, and that can exhaust funds earmarked for beneficiaries. Financial professionals should guide these clients to life insurance products that guarantee consistent retirement income, such as annuities. These options can take the pressure off of people’s cash savings and ensure their principal remains safe despite increasing time spent in retirement.
Retirement will change significantly in the future, and financial professionals need to ensure their offerings change in ways that support client needs.
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