Look out: The Silver Tsunami is coming.
The small early waves are lapping at our economic shores in the form of the first retiring baby boomers. The full effect of the Silver Tsunami, as FranNet's Barney Greenbaum has dubbed it, will be felt as more and more boomers retire.
The problem has been well-documented. Boomers simply have not saved enough to retire like their parents did.
For many people, certainly for those that came of age in the 1950s and '60s, retirement happened at a specific date and time. One day you were working for a company--usually the same one you worked for your whole life. Then, when your 30 years of service was up or you turned 65, you received a gold watch or other trinket and retired with a pension.
Clearly, that is no longer the American retirement model. Fewer and fewer companies offer pensions, and retirees who have insufficient assets to fund their retirement are now the norm, rather than the exception. In this new retirement landscape, how are boomers supposed retire and what are their choices?
When it comes to funding their retirement, most people can't--or at least shouldn't--rely on Social Security alone. Drawing on investment accounts provides extra income to replicate the lifestyle to which retirees are accustomed.
One simple strategy is to withdraw a set percentage of assets each year, say 4 percent. When the market does well, a retiree withdraws 4 percent, and when the market does poorly he still withdraws 4 percent. This strategy, while quite simple, has the inherent weakness that when the economy is down, retirees may have to significantly adjust their spending to accommodate market performance. It's easy to see how this tactic can present major difficulties in a period like we are in now, or even in 2008-09.
A little more complicated, but also more flexible, is the use of ceiling and floor spending limits. In the first year, the investor calculates a dollar amount of spending. The next year, this amount is adjusted for inflation. If the adjusted amount makes up a greater percentage of the assets than the ceiling percentage, the investor uses the ceiling; if the adjusted dollar amount is below the floor percentage, the investor uses the floor.
This approach combines some of the features of the simplest strategy, with flexibility, so that in market downturns the needed spending adjustment is less severe. This additional flexibility can make living with market fluctuations more palatable.
With the coming--and slow passing--of the Great Recession, much financial and emotional security has been lost: Many people who thought they would retire had to postpone retirement because their investment portfolios had declined so severely. Perhaps another important realization is that for many of us, age is not necessarily the barrier it once was.
Staying in the Workforce
For some, working fewer hours, while still keeping their hand in the game, might be a viable option. Part-time work may be a welcome relief from the daily grind for those who have a career they enjoy but don't want to maintain full time. Would working three days a week and having four-day weekends really be that bad?
In many cases, people like their colleagues and co-workers--after all, the social aspect of work can be the most important part. What they dislike are unreasonable deadlines, bosses that are too demanding, long workdays (attorneys often experience this), too much pressure and the like.
But what if a person could work three days a week, say Monday through Wednesday, with no work beyond Wednesday at 5 p.m.? Of course, the worker wouldn't earn the same income as when he or she was working full time. However, this lighter schedule might allow retirees to delay larger withdrawals from their retirement assets, thereby helping those funds to last significantly longer.
In this scenario, a person is not completely retired, nor completely committed to working. If the individual is 65 or older, it might even save the company money, since Medicare may be a better choice than company-provided health insurance.
For some people, these choices will seem less than ideal--especially for those who always dreamed of an unstructured and unencumbered retirement. For others, designing a retirement that includes the best aspects of work and leisure is an ideal combination. Compromising on those things that are less important, while keeping those that are most important, is one of the ways a financial advisor can be of real help as you design the retirement that is right for you.
Seth Becker is a Registered Financial Consultant and financial planner with Oakstone Financial Management in Gahanna. He can be reached at (614) 775-9469 or firstname.lastname@example.org.
Reprinted from the December 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.