When you think of retirement, what comes to mind? Are you sitting in a rocking chair, watching the sunset from your porch? Or are you hang gliding in Aruba, finishing a triathlon, starting a new business or even volunteering in Africa?
There's no right or wrong answer, but yours may well depend on the generation you belong to.
The Baby Boomers — those born between 1946 and 1964 — are living longer and staying healthier than their parents' generation did. This fact is radically changing their retirement plans, even changing the very definition of the word "retirement," both for boomers and the generations that follow. And their financial and career planning is changing accordingly. "The baby-boomer generation has benefited from advances in medicine and education, and from being more physically active," says Alex Gonzalez, Area Wealth Executive for Regions Private Wealth Management in Central Florida. "All of these contribute to a healthier and longer life. For boomers, 60 is the new 50. They see themselves as young, and are living active lifestyles. They're traveling the globe and enjoying their favorite sport. They're supporting social issues and their favorite charities, whether as a volunteer or with their resources. They're not sitting idly by passing the time. They're controlling their own destiny and enjoying the rewards of a successful career."
These changes make retirement planning exciting, as more people are leading longer, more fulfilling lives. But a longer life also comes with challenges: A more active retirement may require more income than a traditional retirement does, while living longer could increase a retiree's total savings needs. Affluent retirees must also balance their desire for a fulfilling lifestyle with a desire to give to charities and assist family members. "All of this makes the planning discussion even more essential," Gonzalez says.
A New Stage
In the traditional model of retirement, workers quit the workforce the day they turn 65 and spend the rest of their days at leisure. That model is changing, however, as many boomers plan to work beyond their traditional retirement age. A study by Transamerica Center for Retirement Studies found that 65 percent of baby boomers plan to work past age 65 and do not plan to retire.1 Many hope to reduce their work hours — or move to a less-demanding role — in order to enjoy more leisure time.
Many boomers are being forced to work longer because they haven't saved enough, or they suffered the loss of home or portfolio value in the Great Recession. But even many high-income boomers are choosing to work longer, Gonzalez says: "They enjoy their work, and they still feel young and healthy enough to keep going." A gradual, or "phased," retirement can counter the lost sense of purpose that many career-oriented individuals are prone to feeling when they stop working, Gonzalez adds.
Other affluent boomers are taking a more adventurous route by shifting gears and deciding to follow their passions. With wealth building no longer a pressing issue, boomers can take their skills in an entirely new direction and focus their endeavors on personal fulfillment or community impact. For example, Gonzalez says, some people choose to turn their professional expertise into volunteer work, such as a dentist who performs medical mission trips to poor countries or a successful entrepreneur who consults with young entrepreneurs to help them grow their businesses. Some are choosing entirely new career paths based on a personal passion, even going back to school to get new degrees — whether in teaching or social work.
Some entrepreneurs sell their long-established businesses as they approach typical retirement age, but start up an entirely different type of business in retirement. "It's almost like your retirement allows you to have your dream job, or a fulfilling type of adventure," says Gonzalez.
Wealth is an enabler for these new careers, sometimes called "second acts." In the past, retirees tended to move closer to their families in retirement, partly out of necessity. But affluent individuals can often afford to hire outsiders to assist with their daily needs. Freed from the need to follow their families, older affluent individuals can move where their passions and preferences take them. Some affluent boomers move to warmer climates, at least part time, perhaps maintaining another residence closer to family and friends.
The Logistics
A second act might be a more fulfilling way to retire, but it may come at a cost. Affluent couples or individuals who plan to spend much of their retirement traveling the world, buying a second home or pursuing a favorite higher-cost recreational activity, will likely need to save more than those who plan to stay close to home and, say, pursue volunteer work. A 2013 study by investment research firm Morningstar Inc. found that income needs vary greatly among retirees, depending on their consumption habits.2
The traditional idea of needing to replace 80 percent of pre-retirement income is no longer valid: Some retirees will need more than that; others will need much less. The study notes, however, that retirement spending tends to peak first in the earliest years of retirement when people are living out their dreams and then again in the latter part of retirement, when healthcare costs tend to rise.
There are plenty of competing uses for retirement savings — not just for income throughout retirement, but also for charities and extended family. Research on high-net-worth investors has found that concerns for the health of their spouse, the financial well-being of their children and grandchildren, and responsibility for aging parents all ranked ahead of concerns of not having enough assets set aside for their own retirement. Meanwhile, the younger half of the baby-boom generation has lived through a period when most corporations have eliminated or scaled down their pension plans.
As a result, most baby boomers understand that their retirement will be primarily self-funded through sources such as an IRA or 401(k), Gonzalez says. "They understand the value of investing over a lifetime, even during their retirement years. And they understand that traditional retirement income sources like CDs and savings accounts generally don't provide the type of return needed for retirement in today's environment of low interest rates."
Generational Differences
Like the boomers, affluent Generation Xers (those born between 1965 and 1980) and millennials (those born between 1981 and 2000) also expect to have longer and more recreation-filled retirements than their forebears did. But most of them won't benefit from pensions. It's never too early for younger workers to start thinking about retirement, Gonzalez says. Many individuals build their wealth by making a concentrated bet-whether on a business or a corporate career -and end up with most of their wealth tied up in their business or in their company's stock.
A key part of financial planning at any stage is ensuring that your assets are diversified so your retirement security doesn't hinge on the fate of any single venture. One marked difference between affluent millennials and their predecessors, Gonzalez says, is that millennials seem to be more socially conscious. Raised during a time when information about global issues spreads quickly through social media, their philanthropy often benefits social causes such as the environment or poverty, rather than cultural causes like opera or art museums.
People heading into retirement face a challenging environment. Interest rates that have generally declined since the1980s are now very low. That means it's essential that people start planning for retirement "sooner than ever before," Gonzalez says.
¹Transamerica Center for Retirement Studies, “The Retirement Readiness of Three Unique Generations: Baby Boomers, Generation X, and Millennials,” April 2014.
2Blanchett, David J., Morningstar Inc., “Estimating the True Cost of Retirement,” Nov. 5, 2013.
