The word “retirement” dates back to the 1590s, where it was defined along military lines: “the act of retreating, of falling back; withdrawing into seclusion.” It took another 50 years for the word to approach its current meaning — to “withdraw from occupation or business.”
Luckily, you don’t need to reach back to the 16th century to understand your retirement today. Below is a brief history of retirement, how we got to the structural position it now occupies, and some historical aspects which will need addressing in a proper plan.
From Humble Beginnings
Though the concept of retirement had already existed informally in one way or another, the first government-level retirement program began in the early 1880s in Germany. Facing pressure from left-wing workers’ parties, Chancellor Otto von Bismarck instituted a pension — as well as a mandatory retirement from work — for those over 70. Despite its age, the German welfare program still resembles a modern retirement plan, with disability benefits and contributions from employees, employers, and the government.
Taking Shape
The chief characteristics of the modern American retirement came about in the mid-1930s, taking shape within President Franklin Roosevelt’s New Deal program. Building on a 1933 plan to give each American over 60 a monthly income of $200 ($5,080.20 today), the 1935 Social Security Act provided an income to elderly and infirmed Americans, and remains one of the most popular laws in effect nationwide.
Amendments to the Social Security Act over the years have expanded its coverage base and today includes both Medicare and Medicaid.
Problems Facing the Modern Retirement
As the contours of modern retirements have developed, some parts have begun to show their age. Have existing segments become more expensive? Are newer developments better for a particular plan, or is it better for them to stay the course? Below are just a few considerations which have emerged alongside modernizing trends:
Social Security
As Social Security has developed, it’s taken on a unique role within one’s retirement portfolio. For a while, it was considered the chief part — if not the only part — of someone’s retirement income. Now, however, it’s not meant to be — and not quite capable of being — the entirety of a retirement income structure.
Consider Social Security as a supplement in a client’s portfolio — a good, consistent way to bolster a diverse set of income streams. Alongside other income sources like annuities or insurance policies, Social Security works best as a building block, not a lodestone.
Pensions & 401(k)s
While it’s not the near ubiquitous plan it once was, pensions still remain a key source of income for many Americans. Today, public pension plans in the United States cover 12.4 million retirees, holding about $6 trillion in total assets.
Despite this, only 29% of all workers in the United States still have pensions. That’s to say: less than a third of currently working Americans have that reliable source of income for their retirement. That number continues to decrease, which means more and more clients will need to expand their retirement income streams to make up for the gap.
Conversely, the 401(k) rose in popularity during the 1980s and today is used by 82% of Americans. Still, it has its limitations: funds cannot be withdrawn early without a penalty, and related tax obligations could hit hard right around retirement age. Rollovers from employer-sponsored plans into other vehicles, such as a Roth IRA, could forestall later tax burdens and work as a better fit for a client’s particular situation.
Healthcare Costs
It’s a fact of the industry that healthcare costs continue to rise year after year. Obviously, this poses an issue for retirees and pre-retirees who will likely need medical care in greater frequency or scope than in previous years. Having healthcare costs eat into principal is a surefire way to run out of money.
As healthcare costs continue to outpace cost-of-living adjustments, considerations like long-term care become more important for a more secure portfolio. This way, unforeseen problems can be anticipated and paid for in advance, protecting one’s income from decimation.
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