Baby boomers are justified in longing for the 'good ole' days when it comes to retirement planning. Our parents path to retiring was so defined compared to ours it is hard to understand if any planning had to precede the retirement.
Contingency planning has become as important as any aspect of retirement planning with the exception of wealth creation. And if you do not plan for the contingencies you really have no idea how much wealth needs to be created.
Why is there such a difference between our retirement (I am a baby boomer) and our parents?
Healthcare- We might as well start with the biggest contingency of all. It was common for our parent's employers to offer healthcare insurance in retirement for its former employees. Health insurance and healthcare was a more manageable expense a generation ago.
Today it has become so expensive most employers do not offer healthcare insurance for retirees. Since employers are subsidizing 70-80% of employee healthcare costs while baby boomers work, it is likely that only about 3-4% of your expenses are healthcare related. When people retire and do not enjoy the subsidies any longer their healthcare expenses rise to 12-15% of their living expenses.
Planning for this expense might keep you working a few more years. Ignoring it could cause you to fall short of money in retirement. Medicare will help, but studies show a couple age 65 to 80 should expect to pay $232,000 in healthcare expenses that Medicare does not cover. In addition healthcare expenses are rising three times faster than inflation so expect this variable to get worse before it gets better.
Pensions vs. 401K's- Pensions were very popular employer offerings in our parent's generation. Basically pensions are defined benefit plans that gave the employee an accurate estimate of how much monthly income (or lump sum dollars) would be available when the employee retired.
The prohibitive corporate expense of offering pensions has caused them to go the way of the dinosaur and be replaced by 401K's or similar retirement plans. 401K's have nice tax advantages but the burden of creating wealth has fallen on the employee and the results are not as predictable. On a positive note the results could be better with savvy investing but the uncertainty creates another contingency to plan for.
Social Security- Our parents had no worries about Social Security being there when they retired. Even though it will most likely be there for us (or pity the politicians that take it away), it will probably be less money than we are currently told we will get.
In 1930 there were 30 workers supporting every retiree in America. In 2040 there will only be 1.1 workers for every retiree, so changes are likely. In the past Social Security has funded 25-33% of retiree's expenses. That range will probably decrease for us.
Life Expectancy- The good news is we are living longer than our parents. However we have to fund the extra years of our lives which is another contingency to account for in our retirement plan.
Alright, our parents enjoyed a more predictable retirement. Pensions and Social Security provided predictable income streams. Employer provided healthcare for retirees and younger mortality rates made expenses more predictable. Just because our parents retirement was more predictable does not mean ours cannot be better. A well managed 401K and IRA can yield much higher streams of income than pensions.
The important point for baby boomers is to start saving and investing today if you are not already. Also put together a retirement plan that accounts for the above contingencies as well as inflation and major expenses. That is the only way you will know how much wealth it takes to retire. If you do it right you will most likely enjoy a very comfortable retirement... Good Luck