Millennials will retire in an environment completely unlike what they have witnessed for grandma and grandpa, or maybe even their own parents. Why? Social Security, the lynchpin of retirement, is projected to be exhausted by 2037. Defined benefit pensions, once available to 60% of private company employees in the early 1980s, are now down to 4%. Millennials must realize that while standards of living have skyrocketed, the fiscal crutches Americans lean on may soon be removed.
The primary concerns affecting a millennial’s probability of success in retirement involve the usual factors, but with varying degrees of impact versus prior generations.
Longevity Risk: This is the ultimate risk multiplier in that everything listed below becomes amplified as time is added. Preparation: Work longer. Take on an encore career, embrace the gig economy, and adapt in later years to alleviate pressure on your retirement savings. Disability insurance is key to protect this lengthy career.
Guaranteed Lifetime Income: Social Security and defined benefit pensions simplified matters for many prior and current retirees, that big unknown will certainly affect millennials’ ability to plan. Preparation: Consider utilizing annuities, fixed income or dividend portfolios, rental properties, or other assets that can offer passive income.
Taxes: The US debt is now more than $22 trillion. It is true that such debt must eventually be paid, or at least serviced over time to extend credit. The only methods of balancing any budget, just like a household, are to make more and/or spend less. That means federal/state/local retiree benefits can go down and/or taxes can go up. It will be a guessing game as to how your different assets, accounts, etc. will be targeted by congress between the years of 2048-2063 and beyond. Preparation: Diversify future tax liabilities through Roth options, post-tax investments, or Whole Life cash values.
Healthcare: With medical costs averaging 3x the amount for senior citizens versus young professionals, millennials will have to find a way to afford care in future decades, if the programs mentioned earlier such as Medicare end up looking different. Preparation: Certainly the product offering will change within the next 30 years, but long-term care hybrids and/or life insurance with long-term care riders can help.
Market Risk: Since the transition from Defined Benefit pensions to Defined Contribution plans, younger Americans have become much more familiar with stock market exposure. Preparation: come up with a diversified investment strategy that can help you stay the course throughout.
Inflation: The silent killer must only be addressed for a longer time frame as people continue to live longer, therefore stretching out retirement horizons. Preparation: Put your money to work once adequate liquidity has been achieved.
About the Author
Bryan M. Kuderna, CFP®, RICP®, LUTCF, is the host of The Kuderna Podcast, and founder of Kuderna Financial Team, Shrewsbury.
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