The Needs and Strategies for a Resourceful Retirement Planning
Family Financial Research & Innovation Institute (FFRII)
September 11, 2024​
Planning for a Worry-free Retirement is More and More Challenging​
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A study by the National Institute on Retirement Security (NIRS) in 2024 [1] reported that when asked if the nation faces a retirement crisis, 79 % of Americans agree there indeed is a retirement crisis, up from 67% in 2020. More than half of Americans (55%) are concerned that they cannot achieve financial security in retirement. When it comes to inflation, 73% of respondents said recent inflation has them more concerned about retirement. The vast majority of Americans (87%) say leaders in Washington don’t understand how hard it is for workers to save for retirement, up from 76 percent in 2020.
​Studies by the National Council on Aging (NCOA) reported in 2024 [2] found that nearly 50% of adults 60 and older had household incomes below the Elder Index value for where they lived. This means their average income was below the standard needed to afford basic needs. The research discovered that 80% of households with older adults—or 47 million—are financially struggling today or are at risk of falling into economic insecurity as they age. It is worsened by inflation, rising health care costs, and the fact that someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and supports in their lifetime (long-term care is expensive and not covered by Medicare).​
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The problematic 'Three-Legged Stool' retirement income strategy
​The "three-legged stool" is a classic term that the financial world often used to explain the three primary sources of retirement income: Social Security, employer pensions, and personal savings. The idea was that these three components would collectively create a stable financial base for retirement, with no single source expected to fully support retirees by itself.​​​ The traditional three-legged stool model has become less stable over time, particularly due to the decline of defined benefit pensions in the private sector. Today’s retirees often need to rely more heavily on personal savings and investments, while Social Security and defined contribution plans provide basic support. This shift has increased the need for personal financial planning and literacy to ensure a comfortable retirement. One leg of the stool, pensions, has been replaced by defined-contribution plans that place the investment burden on the individual. Another leg of the stool, Social Security, is looking rickety, with predictions that the system could run out of reserves as early as 2033.​​
The falling of pension benefits​​
Most of young Americans perhaps have no idea what a pension is. The rise and fall of the American pension system reflects major shifts in the economy, labor market, and retirement planning. Pensions first emerged in the late 19th century, with the first private pension offered by American Express in 1875. They gained popularity in the mid-20th century, especially after World War II, when defined benefit (DB) pensions became a key part of the compensation package for many workers, particularly in large corporations and unionized industries. These plans guaranteed a set income for retirees, based on their years of service and salary.
However, by the late 20th century, pensions began to decline due to rising costs, increased life expectancy, and economic pressures. Employers sought to reduce their financial liabilities, leading to a shift from DB pensions to defined contribution (DC) plans, such as 401(k)s, which place the burden of saving and investing on employees. This trend accelerated in the 1980s and 1990s, with most private-sector companies moving away from traditional pensions. Today, defined benefit pensions are rare in the private sector but remain common in public employment, as such government offices and school systems. The pension system's fall has made retirement planning more reliant on individual-chosen savings and investments.​
The crisis of the social security system​
The Social Security system in the United States is facing a significant crisis due to a combination of demographic shifts and financial challenges. The primary issue stems from an aging population—baby boomers are retiring in large numbers, while birth rates have declined, resulting in fewer workers supporting a growing number of retirees. Social Security is a pay-as-you-go system, meaning current workers’ taxes fund the benefits of current retirees. With fewer workers and more retirees living longer, the program’s trust fund, The Old-Age and Survivors Insurance (OASI) Trust Fund, is projected to become depleted after 2033 [3], with the continuing program income only sufficient to pay 79% of scheduled benefits. Without reforms, this could lead to a reduction in benefits for future retirees. Potential solutions—such as raising the retirement age, increasing payroll taxes, or adjusting benefits—are politically contentious, making meaningful reform difficult. Another fact needs to be realized is that even without reduction, the social security benefit is designed for cover the very basic needs of retirement expenses, such as basic groceries and regular bills.
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The financial Burden of long-term care
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Americans are deeply worried about the cost of long-term care in retirement. According to a new NCOA report published in 2024, a major struggling expense for older adults is long-term services and supports (LTSS, or 'long-term care'), which can range from help with daily living activities to medical care in a skilled nursing facility. Data revealed that 69 percent of seniors will require some type of long-term care. Many Americans underestimate the likelihood of needing long-term care, though more than half of adults over 65 will require it for less than two years, and about one in seven will need care for more than five years. Covering even a year of care can be financially overwhelming: in 2018, the average annual cost of a private room in a nursing home was $105,485, while home health aides cost around $37,440. The costs of LTSS have consistently risen, with nursing home and adult day services increasing 3.2% annually between 2013 and 2018, and home care services going up by 1% per year during the same period. These costs continued to climb in 2020. The financial burden of LTSS is subject to economic pressures, which can limit access to necessary care and leave many older adults without the long-term care they need.
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According to Genworth's 2023 survey, the national median cost of a private room in a nursing home now exceeds $116,800 per year, reflecting a 4.9% increase from 2022. Meanwhile, home health aide services rose by 10%, reaching a median cost of $75,500 annually. Assisted living facilities have seen more moderate cost increases, with a 1.4% rise in 2023 to about $64,200 per year. These increases are driven by factors like inflation and a shortage of skilled workers, particularly in home care and nursing facilities. With millions of Baby Boomers aging, demand for long-term care services continues to rise, intensifying the need for skilled caregivers, which further pressures costs. Planning for these expenses is critical, as the financial burden of long-term care can quickly deplete retirement savings​.​
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Risks that must be considered in retirement financial planning
Market volatility risks
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When choosing retirement funds and participating in the financial markets, there are several risks that individuals must consider to safeguard their future financial security. One of the primary risks is market volatility, where investments can fluctuate in value due to economic conditions, geopolitical events, or changes in investor sentiment. While the stock market can often recover and offer decent long-term returns, short-term downturns can last for several years that erode portfolio values. Over the past 50 years, the U.S. stock market has experienced several significant crashes, and the time it took to recover has varied depending on the severity of the downturn and the broader economic conditions.
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For example, the burst of the technology bubble (Dot-Com Bubble, 2000–2002) saw the market drop by about 49% over a prolonged period. Recovery took around 7 years, with the S&P 500 regaining its previous peak in 2007, just before the next major crisis. The Great Financial Crisis (2008) resulted in a 57% market crash during the 2008 global financial crisis. Recovery was slower, taking roughly 5.5 years for the S&P 500 to reach its pre-crash levels by March 2013, aided by government stimulus and low interest rates. The stock market experienced a sharp decline in 2022, driven by rising inflation, interest rate hikes, and fears of a looming recession. Major indices like the S&P 500 fell by nearly 20%, with tech stocks seeing even steeper losses. In total, it took approximately 12 to 18 months for the market to see substantial recovery following the 2022 downturn​.
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While it is true that markets tend to recover over the long term, this perspective is more practical for younger investors who have the time to ride out fluctuations and benefit from market rebounds. For retirees or those nearing retirement, however, the time horizon for recovery is more limited. Waiting several years or even a decade for the market to bounce back may not be feasible, and the emotional toll of watching retirement accounts such as 401(k)s or IRAs lose value can be overwhelming. For individuals retiring during a market downturn, like the early 2000s crash that took nearly 13 years to fully recover, the financial strain can be severe. A prolonged downturn can lead to significant anxiety, particularly if your retirement strategy depends heavily on market-based investments.
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Sequence of return risk
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Another dangerous risk that is often neglected by non-professionals is the risk of sequence of return, which exists regardless the long-term recovery of the market. The sequence of returns risk refers to the order in which investment returns occur during the withdrawal phase of retirement. This risk is particularly critical for retirees, as poor market performance early in retirement can drastically affect the longevity of their savings. For example, if a retiree experiences negative returns during the first few years of retirement while simultaneously withdrawing from their portfolio, the portfolio's value may be depleted more quickly. Data from the Great Recession (2007-2009) illustrates this risk: retirees who withdrew 4% of their portfolios during the crisis saw their savings significantly reduced, and many experienced difficulty recovering as the market rebounded.
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Consider two retirees with identical portfolios who retire in different market environments. If one retires during a bull market and the other during a downturn, their outcomes can be vastly different. Research shows that experiencing even just two or three years of negative returns early in retirement can increase the likelihood of running out of money. For instance, a study using data from 1973 to 2003 found that those who retired just before the bear market of the 1970s needed to reduce spending or face depletion, while those retiring in the mid-1980s had a much smoother path to retirement security due to strong market performance early in their retirement years​
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Longevity risk
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Longevity risk in retirement refers to the financial uncertainty associated with outliving one's savings. As people live longer due to advances in healthcare and improved living conditions, retirees face the challenge of ensuring that their income lasts throughout their extended lifespan. This risk is exacerbated by the fact that traditional retirement planning often relies on estimates of life expectancy that may fall short if individuals live significantly longer than anticipated. Consequently, retirees might find themselves with inadequate resources later in life, leading to potential financial stress and a reduced quality of life.
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According to the Social Security Administration, a 65-year-old today has an average life expectancy of about 85 years, but nearly 30% will live beyond 90. This extended lifespan creates uncertainty about whether retirement savings will be sufficient. For instance, if a retiree's portfolio, such as those with 401 (k) or IRA, is designed to last 20 years, but they live for 30 or more, they may face financial strain. The possibility of outliving one's savings is heightened by increasing healthcare costs and inflation, which can further erode retirement funds.
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To address longevity risk, retirees can consider several strategies. Purchasing an annuity, for example, can provide a steady income stream for life, mitigating the risk of outliving savings. Research from the Employee Benefit Research Institute shows that annuities can reduce the risk of running out of money by up to 60% compared to a standard withdrawal strategy.​​
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Strategies to plan a worry-free and resourceful retirement life
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​Establish a balanced portfolio
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A balanced portfolio aims to achieve a mix of growth and income while managing risk, ensuring that retirement funds are sustainable and that retirees can enjoy a stable and fulfilling retirement. A balanced portfolio spreads investments across different asset classes—such as traditional retirement accounts (e.g., IRA), annuities, cash—reducing the risk associated with any single investment. This diversification helps to mitigate the impact of market volatility and economic downturns on the overall portfolio. A balanced portfolio is designed to address changing market conditions and personal circumstances to control risk levels and ensures that the portfolio continues to align with retirement goals. A well-balanced portfolio can provide peace of mind by reducing the likelihood of drastic losses and smoothing out returns. This stability can help retirees feel more secure and less anxious about their financial future.
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Incorporate life-time income solutions
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As mentioned above, it is a shame that the majority of private industrials do not provide pensions to employees any more.
​The study by NIRS found that Americans express strong support for pensions. More than three-fourths of Americans have a favorable view of pensions, while 77 percent agree that the disappearance of pensions makes it harder to achieve the American Dream. Eighty-three percent of Americans say that all workers should have a pension so they can be independent and self-reliant in retirement. How seniors receive life-time incomes without the access to traditional pension benefits?
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Annuities have become a favorable tool by most financial planners in the retirement strategies. An annuity is often considered a modern alternative to traditional pension plans, offering similar benefits in terms of providing a steady income during retirement. Like pensions, annuities are designed to deliver regular payments to retirees, ensuring financial stability and reducing the risk of outliving one's savings. With an annuity, individuals can convert a lump sum or a series of payments into a guaranteed income stream for life or a fixed period, much like how a pension pays out a predetermined amount based on salary and years of service.
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While traditional pensions are increasingly rare in the private sector and typically require an employer's involvement, annuities offer a flexible, individual-driven solution. They can be purchased from financial institutions and tailored to fit personal retirement needs, including options for inflation protection, spousal benefits, and varying payout structures. As such, annuities serve as a viable alternative to pensions, providing retirees with a reliable and customizable income source to support their financial security in retirement.
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​Ensure Long-term care coverage
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As discussed above, long-term care coverage is essential in retirement due to the high costs associated with services such as nursing homes, assisted living, and in-home care. As life expectancies increase, the likelihood of needing such care grows, making it crucial to have financial protection in place. Long-term care insurance helps cover these potentially exorbitant expenses, preserving your retirement savings and ensuring that you receive the necessary care without financial strain.
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Additionally, long-term care coverage alleviates the burden on family members who might otherwise face emotional and financial stress. It provides access to a variety of care options, allowing for personalized and flexible care choices that align with your preferences. Overall, having this coverage offers peace of mind, knowing you are prepared for future health needs and can maintain a higher quality of life while enjoying your retirement.
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Work with retirement planning professionals
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Retirement planning professionals have specialized knowledge and experience in areas such as investment strategies, tax implications, and estate planning. They can provide valuable insights and recommendations based on current market conditions, financial regulations, and best practices, helping to optimize your retirement strategy and navigate complex financial landscapes. Professionals can tailor a balanced retirement plan to your unique goals, needs, and financial situation. They assess your current assets, income requirements, risk tolerance, and retirement objectives to develop a customized plan that aligns with your specific circumstances. This personalized approach ensures that your plan addresses your individual needs and adapts to changes in your life or the financial environment.
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In addition, financial service professionals can help identify and mitigate various risks associated with retirement, including longevity risk, investment risk, and inflation risk. They provide strategies to manage these risks effectively, such as diversifying investments, planning for healthcare costs, and creating a sustainable withdrawal strategy. Retirement planning is not a one-time event but an ongoing process. Professionals regularly review and adjust your plan to reflect changes in your financial situation, goals, or market conditions. This continuous oversight ensures that your retirement strategy remains effective and aligned with your evolving needs.
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Conclusions
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Planning for retirement is more and more challenging in the recent decades. A balanced retirement planning is essential for ensuring a secure and comfortable future, allowing you to enjoy your retirement years without financial stress. By proactively assessing your financial needs, setting clear goals, and developing a comprehensive strategy, you can effectively manage savings, investments, and income streams to cover your expenses and maintain your desired lifestyle. Effective retirement planning also helps mitigate risks such as market volatility, longevity, and healthcare costs, providing peace of mind and the confidence that your financial future is well-prepared and stable.
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Our Faundare family financial strategists are here to help you navigate these uncertainties with confidence. We offer professional strategies designed to protect your retirement funds from market disruptions and enhance their growth potential. Whether you’re looking to optimize your current retirement portfolios or explore new opportunities for a better future, we’re committed to guiding you toward a secure and resourceful retirement.
References:​[1]https://www.nirsonline.org/reports/retirementinsecurity2024/#:~:text=When%20asked%20if%20the%20nation,achieve%20financial%20security%20in%20retirement.