Is Retirement Becoming Obsolete?

Every year, the traditional concept of retirement becomes harder to achieve due to increasing life expectancies. At the same time, retirement is becoming less necessary.

Is Retirement Possible?

In 1980, the remaining life expectancy for somebody aged 65 was 16.5 years. For someone aged 65 today, it’s 21 years. In other words, somebody retiring at age 65 today needs their money to last 27% longer than somebody retiring 30 years ago.

In addition, people don’t usually wait until age 65 to retire anymore. According to the U.S. Department of Labor, people retire at an average age of 62, at which point their remaining life expectancy is 23.5 years.

The takeaway: Today’s retirements are intended to last, on average, roughly 42% longer than those of a few decades ago. And, since we’re retiring earlier, we have 3 fewer years to accumulate the necessary amount of savings. On top of all this, we must consider the possibility that Social Security won’t pay out as promised in the way it did for prior generations.

Said another way, the typical person now works for 40 years (from age 22 to 62), and during that time, he/she has to save enough money to last another 20-30 years. That’s no small task!

Is it any surprise that people are worried about their ability to retire?

Is Retirement Necessary?

Over the last three decades, life expectancies have increased by almost nine years. Yet, as a society, we have not increased the number of years that a typical person spends working. This seems odd given that:

1. Fewer jobs require manual labor, and
2. Today’s 65-years old are in better shape physically and mentally than those of previous generations.

Sure, the type and amount of work that’s appropriate at age 65 or 70 may not be the same as what was appropriate at age 40. But that doesn’t mean that no work is appropriate. There are plenty of fulfilling, part-time jobs in which a 60-something can excel. (Think: Teaching something you’re passionate about.)

What Are Your Options?

Retiring at 62, earning no income for the rest of your life, and leaving something to your heirs just isn’t feasible for most people. Something has to give. The way I see it, most of us have the following options:

• Postpone retirement: Continue full-time work beyond age 65.
• Opt for a phased retirement, gradually shifting to less work (or less demanding work) as time goes by.
• If you’re willing to give up the idea of leaving money to your kids, you can reduce the amount of money necessary to retire by buying single premium immediate annuity with a portion of your portfolio.

Or, you can stick with the conventional plan: Attempt to save a colossal sum of money through extreme frugality and crossing your fingers that the stock market puts up the returns you need when you need them.

About the author: Mike Piper writes at Oblivious Investor where he provides plain-English explanations of topics like Roth IRA withdrawal rules and 2011 tax bracket changes.