(Sam Swenson, CFA, CPA)
In an environment of rising interest rates, still high inflation and a falling stock market, both pre-retirees and retirees have strong concerns about making ends meet with retirement. Realistically, these are valid concerns, which makes it all the more valuable to understand what retirement income might look like over the next 10 years. Rather than relying on social security alone, a large proportion of retirees are likely to benefit from active income when their primary careers come to an end.
Given economic trends, as well as constantly changing demographics, there is good reason to believe that retirement income will have a different composition in the future.
The reality of social security
While social security serves as a reliable source of income for most retirees, the overwhelming probability is that it won’t be enough to cover all retirement expenses. On the bright side, Social Security benefits increase through cost-of-living (COLA) adjustments, which means they’re one of the few guaranteed, inflation-adjusted streams of income that retirees depend on. This is why getting the most out of Social Security, working longer or earning more during 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 some reduction in benefits down the line. This is the result of a dwindling social security reserve, with the SSA trust fund reserve slated to run out in 2035. That said, the likelihood of social security disappearing altogether at this stage is remote. More likely, those who wait until the mid-1930s to retire could see benefits paid for only 80% of their primary insurance amount.
All of this is to say that those most likely to retire will have had enough years of work at a high enough earnings rate to secure a sustained income stream into the 1980s and 1990s.
Personal savings matter more
As company-sponsored retirement 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. That means hitting the 401 (k) s maximum if IRA will pay huge dividends (both literally and figuratively) when it comes to retiring in the 1930s. Those with large personal savings to their name will be in a strong position to supplement Social Security and cope with ever-increasing expenses.
Unfortunately, stock market returns are variable, which means we have no idea how personal portfolios will fare over the next decade. But we know that those who maximize contributions to their retirement accounts as soon as possible will be better suited to tolerate a low-yield environment.
Active income will be more common
With the rise of remote work and the gig economy, earning even a small portion of 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 also be an interesting way to spend a few hours a day in retirement. Additionally, as research has revealed, those who remain intellectually active in retirement tend to report higher levels of happiness and also tend to live longer on average.
Another piece 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 you retire from your main career can be an important defense method, especially when paired with social security and some investment accounts.
Take the pension into your own hands
The main starting point is that the possibility of fully funded retirement will depend on savers and their individual behavior. Social Security will still be a good option for maintaining a minimum income, but the rest of the retirement income will have to be earned personally. Gone are the days when a company pension and social security would have been enough to support a retired family. The stakes are much higher now and will be in the near future, but both workers and savers can still expect quality results with enough effort and advance planning.
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