Once perceived as a time of comfort, leisure, and freedom from the rat race’s burdens, retirement is transforming. For today’s retirement planners and retirees, the definition of retirement is more complex than it once was.
An uncertain economic environment, volatility, changing technology, and evolving financial landscapes collide with a rising global lifespan. These factors, plus many others, have redefined what it means to retire securely.
The global population is aging at an accelerated rate, and global life expectancy has increased significantly. Statistics from the World Health Organization (WHO) reflect these demographic shifts.
According to the WHO, the number of people aged 60 and older already outnumbers those younger than five. By 2030, about one in six people worldwide will be over 60.
The part of the global population aged 60 years upwards will increase from 1 billion in the previous decade to 1.4 billion in 2030. By 2050, those aged 60 and older will double to 2.1 billion. In addition, those 80 years or older are expected to triple in number sometime towards 2050 to reach a staggering 426 million.
These demographic changes present new challenges, particularly ensuring that retirement funds last through increasingly longer lifespans. The traditional retirement age of 65, established when life expectancy was significantly lower, no longer aligns with current realities where individuals can expect to live well into their seventies, eighties, or nineties.
Here, we discuss retirees’ unique contemporary challenges and explore the importance of diversifying revenue streams to ensure financial stability and income regularity in their golden years.
Financial Insecurity and the Aging Global Population
Retirees are increasingly concerned about their financial security. A recent report by the Transamerica Center for Retirement Studies, published in 2023, found that workers in the pre-retirement bracket aged 50 and older are less confident in their futures. They are more anxious about retiring securely and comfortably than present retirees.
Few in both groups have any written retirement strategy. In the survey, only 23 percent of retirees and aged 50-plus workers have written down a financial strategy for retirement. Among retirees, only 19 percent have a written retirement plan. Forty-six percent of both cohorts have a general strategy for retirement, but it is unwritten and, therefore, informal. Most concerning is the fact that 30 percent of workers aged 50+ and 36 percent of today’s retirees do not have a plan at all.
No backup plans
As retirement is long and uncertain, a backup plan is crucial. However, according to the same survey, only 31 percent of workers aged 50 and upwards have a backup income plan for forced early retirement or other unexpected loss of income. Fifty-seven percent or over half do not have any contingency plans for retirement income, and 12 percent of survey respondents weren’t sure.
When asked what they could have done differently, 73 percent of the retirees in the survey wished they had saved more consistently, and 66 percent wished they had been more knowledgeable about retirement investing.
Nearly half—49 percent—said they would have liked more employer information and advice on retirement planning. Forty-two percent regretted not relying more on outside experts to do their retirement planning and management, while 45 percent said they regret waiting too long to get started.
Evidence of changing times: shifting sources of retirement income
Pre-retirees and retirees most commonly cited Social Security as their expected or current source of retirement income—82 percent and 90 percent, respectively.
From employee-funded to self-funded
A notable indicator of a changing retirement landscape, age 50-plus workers are more likely than retirees to cite 403(b)s, 401(k)s, and IRAs as their source of retirement income. By contrast, about 39 percent of present retirees get their income from company-funded retirement through pension plans versus only 26 percent of workers aged 50 and over.
Therefore, the trend is veering away from employer-funded defined benefit plans toward employee-funded defined contribution plans such as 401(k)s.
Working past retirement
Today’s pre-retirees live in an environment where the planning assumptions have changed. They expect to work during retirement to supplement their incomes. Over a third, or 34 percent, of workers aged 50-plus responded that they expect income from working in their retirement years.
However, only 5 percent of retirees today said the same. The gap in expectations could point to a perception of insufficiency in future income.
Furthermore, 11 percent of 50-and-over pre-retirees or workers expect to primarily rely on income from continuing to work in retirement.
Conventional Paths to Retirement: Do they still work?
Traditionally, retirees have relied on Social Security and employer-sponsored retirement plans like conventional 401(k)s as the backbone of their retirement strategy.
Social Security: A foundation of retirement protection
Social Security was established in 1935. It provides a crucial financial safety net in the US, with 97 percent of older adults aged 60 to 89 receiving or projected to receive it, according to estimates by the Social Security Administration.
Roughly 50 percent of American seniors depend heavily on Social Security for retirement. US Social Security Commissioner Martin O’Malley states this dependency distinguishes between “poverty and living in dignity.”
Its near-universality makes it a pillar of retirement protection for people of all income brackets.
Projected depletion date
However, Social Security’s sustainability is under scrutiny, with projections indicating potential fund depletion by 2035 if no legislative changes are made.
The depletion date applies to its combined trust funds. These funds help pay benefits when additional money is needed beyond what comes in via payroll taxes. Note that currently, 6.2 percent of workers’ pay is taxed for Social Security purposes. An additional 1.45 percent goes to Medicare. Employer contributions will match the resulting 7.65 percent. For high earners, a further 0.9 percent may be withheld for Medicare.
Even though the combined Social Security trust funds’ depletion date is used to assess the program’s solvency, the funds cannot be combined under current law.
Each of the two trust funds has a specific projected depletion date. The Old-Age and Survivors Insurance Trust Fund—used to pay retired US workers and their families—is forecasted to last until 2033. About 79 percent of the scheduled benefits could be payable by that time.
The Disability Insurance Trust Fund—which pays for disability benefits—can pay full benefits up to 2098, which corresponds to the final year of the projection period.
The government is working to eliminate or delay the nearest shortfall, which has already been pushed one year later from the previous projected shortfall date of 2034 to the new date of 2035. Doing so will bring greater security to the 70 million-plus beneficiaries and help the 180 million workers and their families contribute to the Social Security program.
The looming shortfall is a significant concern for AARP members aged 50 and over. About 20 percent of US families rely on Social Security benefits for their entire income, and approximately 40 percent of families of retirees 65 and older depend on it for at least half their income.
401(k) plans
A 401(k) plan is structured as a retirement savings plan. First authorized by federal legislation in 1978 and named after a vital section of the United States Internal Revenue Code, 401(k) plans have become a standard of US retirement strategies.
These plans offer tax-advantaged retirement savings opportunities. They are employer-provided, defined contribution plans that allow employees to invest their pre-tax dollars in capital markets, growing their money tax-deferred until retirement.
With time, 401(k)s have become a staple for American workers. According to a report by the Investment Company Institute, Americans had invested $7.4 trillion in 401(k)s in the fourth quarter of 2023.
There are two essential 401(k)s types: Roth and traditional. Under a traditional 401(k), employee contributions are pre-tax, meaning they reduce taxable income. However, you are taxed when you withdraw the money during retirement.
By contrast, employee contributions to Roth 401(k)s are made with their after-tax income. Thus, under a Roth 401(k), there’s no tax deduction in the contribution year. The withdrawals under this type of product—qualified distributions—are tax-free.
If you decide to invest or are already invested in a 401(k), you may wonder how your investment choices compare with others. According to Vanguard, as of 2022, the average annual employee contribution to 401(k)s is 7.4 percent of total pay. Contributors who intend to allocate a higher percentage or amount to their 401(k)s will be pleased to know that the IRS has set contribution limits to a reasonably high bar. The contribution limit for employees is $23,000 as of 2024. Workers 50 years of age and older are given a higher limit. As of 2024, it’s $30,500.
How much are people getting from their 401(k)s? The average annual return for this investment is 4.9 percent. However, 401(k) returns are influenced by many variables. Such factors include stock market performance, fees, and your chosen investments within the plan. As a result, it takes work to nail down an accurate average return.
Vanguard, among the largest record retirement record-keeping companies, can provide a general snapshot of five years ending in December 2022. During the year-end of 2022, the rocky equities and bond markets dragged down returns. However, the returns in the stock market and plan contributions balanced things out, resulting in the average annual return figure of 4.9 percent for all those enrolled in the five years.
Limitations of 401(k)s
Despite their popularity, 401(k)s have limitations. Contributions are subject to annual caps, fees vary depending on the provider, and market volatility can significantly impact account balances, potentially jeopardizing retirement security.
The New Retirement Security
A secure retirement encompasses more than just financial stability; it includes maintaining a desired standard of living, covering healthcare costs, maintaining a good credit score, and having the flexibility to manage unforeseen expenses.
A secure retirement also means having the freedom to enjoy leisure activities, travel, and engage in hobbies without worrying about outliving one’s savings. Achieving this level of security requires careful planning, disciplined saving, and strategic investment.
Today, it means increased confidence in your plan’s longevity. As people live decades longer, the conventional retirement plan needs a more robust strategy.
Addressing concerns about the future of retirement income
Since emerging from the pandemic, many have been navigating a turbulent economy and changed prospects. The economic impacts of events such as the 2008 financial crisis or “Great Recession” and the COVID-19 pandemic have further strained retirement savings, underscoring the need for robust financial planning and diversification.
Pre-retirees and retirees are also concerned about the future of Social Security and other sources of retirement income. The closer they get to retirement, the more worried they are about the soundness of their financial plans. Unlike younger workers with longer time horizons, retirees and pre-retirees have little time to recover from economic shocks.
Retirement savings and investments are susceptible to inflation and market volatility. Retirement portfolios need to be able to withstand unexpected shocks that lie ahead.
The Role of Diversification in Retirement Planning
Diversification is a fundamental principle in investment. It aims to reduce financial risk by spreading investments across various asset classes, industries, income streams, and geographies.
The adage “Don’t put all your eggs in one basket” encapsulates the essence of diversification. By allocating investments in different areas, retirees can mitigate the effect of poor performance in their single investments, thereby enhancing their portfolio’s overall stability and growth potential.
Diversification can protect retirement investments by balancing the risks and rewards of different asset classes. For instance, stocks offer high growth potential but also have greater volatility. Conversely, bonds provide more stability but typically yield lower returns. By blending these and other asset types, retirees can achieve a more resilient and growth-oriented portfolio.
Guarding Against Inflation and Other Erosive Factors
One also needs to understand diversification in the context of the various factors that can erode income over time. Inflation, market volatility, healthcare costs, and changing economic landscapes are all potential threats to a secure retirement.
Based on the latest report from the Employee Benefit Research Institute, or EBRI, workers planning retirement and retirees have been reporting significant concerns about inflation and its impact on their hard-earned savings and future spending. Inflation weighs heavily on Americans’ minds. In the EBRI’s 2023 report, 84 percent of workers and 67 percent of retirees worry that today’s increasing cost of living will make it more challenging to save money.
Moreover, approximately 40 percent of workers and 30 percent of retirees are not confident about the prospects of their savings keeping up with the demands of retirement in an inflationary environment. These figures have increased compared to survey results from the previous year when only 30 percent of workers felt the strain.
Americans are also concerned that they will have to make substantial budget cuts to adjust their spending to inflation—some 73 percent of workers and 58 percent of retirees. Up to 75 percent of today’s workers responded that they are concerned their present salary won’t keep up with inflation. Fifty percent of retirees have also reported higher overall spending than expected. The number of retirees with this response has increased significantly over last year’s 36 percent result.
Inflation: the silent thief of retirement income
Inflation is an insidious thief of wealth and value. It refers to the general increase in prices of goods and services over time in a given region. The gradual increase reduces the purchasing power of money.
According to Statista, the world experienced extremely high inflation in the 1980s and 1990s. Since then, inflation has remained stable until the turn of the millennium. It hovered between 3 and 5 percent per year. However, the 2008 financial crisis—now known as the Great Recession—created a sharp inflationary increase. Afterward, it stabilized again in the 2010s but was severely disrupted by another inflation crisis in 2021.
In recent years, inflation fell to 3.5 percent in the first year of the pandemic. It rose again to 4.7 percent in 2021. The pressure of supply chain delays began to impact consumer prices. Geopolitical events like the Russia-Ukraine war further exacerbated inflation.
Rising energy and food prices, fiscal instability due to the pandemic, and consumer insecurity have compounded to create a new global recession. 2023, the global inflation rate reached 6.9 percent, marking the highest annual increase since 1996.
Even a seemingly modest inflation rate can have a devastating impact on retirement savings. For example, calculate what $100 is worth in 25 years. We will use an inflation calculator that sets the inflation rate based on the average annual CPI reading from 1913 to the latest full calendar year and assume a yearly growth of 2.5 percent—considering the Fed’s target inflation rate. Based on this formula, something that costs $100 today will cost approximately $185.39 in 2049, nearly halving your money’s spending power.
The impact of inflation on retirement savings
To illustrate the impact further, consider a retiree with $1,000,000 in their nest egg or savings. Assume an average inflation rate of 3 percent. After 20 years, the purchasing power of that nest egg would be reduced to approximately $553,000 in today’s dollars.
This underscores the importance of accounting for inflation in retirement planning, which ensures that savings do not erode faster than anticipated.
Healthcare and increased longevity
Healthcare costs can significantly impact retirement finances. Medical and healthcare costs can pile up rapidly as we age. On average, these can run in the tens to hundreds of thousands of dollars. Moreover, retirees will need to factor in potential long-term costs.
Coupled with increased longevity, the toll of healthcare expenses exacerbates the financial burden on retirees. With people living longer, often into their seventies, eighties, and nineties, the probability of incurring substantial medical costs increases, necessitating a robust strategy to cover them.
Market volatility
No investor can perfectly time or predict the markets. Market volatility poses a significant and pervasive risk to retirement savings, especially for those who invest heavily in equities.
Economic downturns and black swans, such as the 2008 financial crisis or the market turbulence caused by the COVID-19 pandemic, can drastically decrease the value of a retirement portfolio. The sequence of returns risk is concerning. When people experience significant losses early in retirement, it can deplete savings faster and leave less time for recovery.
Diversifying Revenue Streams: Investment and Income Opportunities
To build a more secure retirement, retirement planners must consider diversifying more than ever. They must explore a variety of investments and income streams beyond conventional paths.
Here is a comprehensive list of opportunities that can help diversify a retirement portfolio:
Bonds and fixed-income securities
Government and corporate bonds, municipal bonds, and Treasury Inflation-Protected Securities (TIPS) offer fixed interest payments and lower risk than stocks.
Investing in the stock market and index funds
Some investors believe in the stock market’s long-term potential. This is especially true for buy-and-hold investors who can select stocks independently or through a financial advisor.
The average stock market return is estimated at 10 percent annually. This figure is measured by the performance of the S&P 500 index. However, that 10 percent average rate is impacted—thus, reduced—inflationary pressures.
Investors can gradually lose about 2 to 3 percent of purchasing power yearly due to inflation.
Thus, stock market investing is most effective when you think long-term and utilize money you don’t need for at least five years. If you are in or approaching retirement and thus have shorter time frames, it’s better to stick to lower-risk options. You can look for a trusted challenger bank and open a high-yield online savings account. With such accounts, you expect more safety with a lower return.
Dividend-Paying Stocks
A dividend stock refers to a share of a publicly traded company that regularly shares its profits with shareholders through dividends. These companies tend to be consistently profitable and are committed to paying dividends.
While dividend-paying stocks may be less exciting than chasing stock volatility, they can be reliably profitable. Rather than going for high-risk investments by chasing the latest craze in the stock market, dividends can make up a significant portion of your total investment return over time.
Dividend stocks provide regular income, appealing to retirees who value reliability and stability.
Annuities: guaranteed long-term income
Annuities are insurance contracts issued and distributed by financial institutions. Individual investors purchase them. Annuities require issuers to pay the purchaser a fixed or variable income stream. The income begins immediately or can be deferred to an agreed-upon future date.
People invest in annuities by making lump-sum payments or monthly premiums. The holding institution issues a steady stream of payments for a given period, which could also last for the remainder of the annuitant’s life.
Annuities are mainly used for retirement income purposes. They provide guaranteed income for life or a specified period. They can become a strategic instrument for ensuring a steady income stream in retirement. Moreover, it helps individuals address the risk of outliving their savings.
Peer-to-peer lending
Peer-to-peer (P2P) lending platforms let individuals lend money directly to borrowers. They can offer higher returns to independent lenders versus traditional savings accounts, albeit with higher risk.
Venturing into the gig economy: Part-time work or consulting
Retirees can tap into the wealth of their experience to generate a new retirement income stream. Leveraging professional expertise in consulting or part-time work can provide additional security. It can also keep retirees engaged and active, protecting their mental and physical health.
Use email forwarding for multiple side projects
It takes a lot of work to consolidate everything in one inbox when juggling several part-time consulting gigs. Retirement planners or retirees can simplify their workflow by using an email forwarding service that guarantees they don’t miss a thing.
Stay in touch with business contacts
Create catch-all addresses that get all the emails sent to unallocated addresses on your domain. You can also send a copy of each message to up to 20 recipients. You can get plans from trusted providers like ForwardMX—they are highly affordable for those beginning their consulting journey, starting at only $5 monthly for an annual subscription.
Small or new business ventures
Retirement can be the perfect opportunity to start a new business. Some retirees already dreamed of becoming entrepreneurs during their employment. Thus, starting a small business or investing in a franchise can be the next logical step. These ventures can offer both income and personal fulfillment.
Alternatively, retirement planners or retirees can start startups or pursue new ideas. However, such paths can be riskier than small businesses involving less capital or franchises with projected income expectations. Careful planning and diligent market research are essential to mitigate risks.
Royalties and intellectual property (IP) income from creative work
Creatives can generate new income streams in retirement. Royalties from books, music, patents, and other intellectual property can provide unconventional yet steady income streams with minimal ongoing effort. Working on your passion could be personally and financially rewarding with proper planning and discipline.
Alternative investments
Alternative investments are financial assets that aren’t classified under conventional investment categories. Conventional categories include cash, stocks, and bonds. Alternative investments may be venture capital or private equity, managed futures, hedge funds, art and antiques, derivatives contracts, and commodities. Real estate is also classified as an alternative investment.
Assets like commodities, hedge funds, private equity, and venture capital can add diversity and growth potential to a retirement portfolio, though they often come with higher risk and complexity.
Real estate investments
Real estate is also a form of alternative investment. It is a time-tested wealth builder. Managed well, it can generate rental income and appreciate over time. Options include direct property ownership, rental properties, and Real Estate Investment Trusts (REITs).
Cryptocurrencies
Cryptocurrencies have defied expectations since they first arrived. According to investment manager VanEck, Bitcoin, in particular, has become the best-performing asset for eight of the past eleven years. It has outperformed gold and minted many new millionaires. However, tens of thousands of cryptocurrencies and tokens exist today, and choosing the right ones can be daunting for the uninitiated.
Moreover, crypto coins are highly volatile. With considerable research and due diligence, investing a small portion of a cryptocurrency retirement portfolio can diversify and potentially enhance returns.
Inflation-Protected Investments: Additional Strategies
Retirees can add inflation-protected securities to their future revenue stream and portfolio to combat inflation.
Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are inflation-protected bonds or IPBs issued by the United States Treasury. Their face value is pegged to the Consumer Price Index (CPI) and adjusted according to inflation rate changes.
The Treasury will pay interest on the bond’s adjusted face value, creating a potentially gradually rising interest payment stream as long as inflation keeps rising. Upon maturity of these bonds, TIPS investors will get the original face value plus the sum of all inflation adjustments since the bond’s issuance.
This ensures that both the principal and the interest payments keep pace with inflation. To illustrate further, take a $1000 investment in a brand new 10-year TIPS with a 2 percent coupon rate. If inflation becomes 3 percent the following year, the bond’s face value will change to $1030. The annual interest payment will be $20.60—2 percent of the adjusted principal.
In a deflationary scenario, the face value and interest payments decrease. However, these will keep pace with the new—and lower—cost of goods and services.
We can view TIPS and other inflation-protected bonds as products offering a “real rate of return.” They reflect an investment’s ROI after inflation is factored in. By comparison, traditional bonds work differently. They offer nominal returns, meaning they have a fixed face value until maturity. Traditional bonds don’t make adjustments for inflation. When investing in a traditional bond, a 5 percent return when inflation rises to 3 percent means your real return is only 2 percent.
Using rental properties as a hedge
Not all real estate properties and investments are created equal. Rental properties can be used as a hedge against rising inflation. Commercial property values and income of well-positioned rental properties tend to rise with inflation. Thus, they provide a steady income stream that helps maintain purchasing power in retirement.
Stocks and equities to outpace inflation
As mentioned, equities have historically outperformed inflation over the long term. While they come with higher volatility, adding stocks to your portfolio of stocks can offer growth potential that outpaces inflation. Investing in dividend-paying stocks can provide regular income while benefiting from capital appreciation.
Insurance and healthcare planning
As we age, health and medical expenses can increase. Adding HSAs or Health Savings Accounts and long-term care insurance are prudent moves that can help you stay financially afloat in your retirement years. Insurance can also provide financial benefits at certain milestones.
Health Savings Accounts (HSAs)
HSAs are tax-advantaged accounts that allow retirement planners to save for medical expenses. Contributions, earnings, and account withdrawals for qualified medical expenses are tax-free. These accounts can serve as a valuable safety net for covering healthcare costs in retirement.
Long-term care insurance (LTC)
Long-term care insurance is prudent, as it can help cover the costs of extended care not covered by regular health insurance or Medicare. LTC coverage provides home health care, nursing home care, and personal or adult daycare. These policies apply to those aged 65 or older or retirees with chronic and disabling conditions needing constant supervision.
Policies vary, so it’s important to evaluate options carefully to ensure they meet potential future needs. However, it’s important to note that LTC insurance offers more options and flexibility than public assistance programs.
How To Deal With a Changing Retirement Landscape
Those approaching retirement are contending with the increasing societal expectation that workers self-fund a more significant portion of their retirement income. Moreover, workers and retirees are increasingly concerned about the impact of inflation on their savings.
Experts emphasize the need for diversification. To become resilient, retirees must consider various assets and income streams. Those planning retirement must create a diversified portfolio with defensive, inflation-protected instruments and those designed for potential growth if their time horizon permits. Diversified portfolios are crucial in managing risk and maximizing returns, especially in today’s environment with low interest rates.
Retirees can also tap into their expertise to harness new income streams in the gig economy. Their decades of experience put them above the rest in work experience and knowledge, making them valuable assets as consultants and part-time workers.
As the global population ages and the economic, technological, and geopolitical climate becomes more unpredictable, we can’t rely on traditional accounts anymore. Retirement planners and retirees need a mix of investments tailored to their goals and preferences to ensure financial stability in the face of volatility and sweeping change.
Featured Image Credit: Photo by V. P.; Pexels
