Over the course of recent decades, we’ve seen a seismic shift in the nature of retirement. People are living longer. On average, a 65-year-old woman has 23 years to live; a 65-year-old man 20 years.1 And those years are often healthy and active ones. “In less than a century, we nearly doubled life expectancy,” says psychologist Laura Carstensen, director of Stanford University’s Center on Longevity. (Read a Q&A with Carstensen: “Envision your future realistically.”) “That is a stunning, stunning change. Now, that’s good, but it’s also challenging because there are no real cultural guideposts—and that creates anxiety.”
The new-normal retirement is not your father’s retirement. For most people, there will be no one day when work stops and retirement begins, but rather a continuum of less work and more leisure—or volunteer work. Nor will there be a gold watch and a pension plan. Only 30% of Americans can count on a traditional defined benefit pension, according to the Employment Benefit Research Institute.2 The rest will have to rely on a combination of Social Security and their retirement savings. And the responsibility for managing a variety of imponderables—from how long you’ll live to what the markets and your portfolio will do—falls squarely on you.
Beyond the “misery myth”
Taking control of your finances during this important turn in life’s road is daunting enough, but the way we engage emotionally with that transition further complicates the process. One of the biggest hurdles to overcome, says Carstensen, is a phenomenon she calls the “misery myth.” It turns out that many of us have a deep-seated, rather irrational fear of old age. Either we can’t fathom what our lives will be like, or we imagine ourselves very old, frail, and lonely—even though modern medicine is keeping many people vital and active well into their 70s and 80s. As a result of this mis-imagining, Carstensen says, we tend to either not plan or plan too conservatively. “Not planning is the single biggest mistake people make,” she says.
The solution is to engage with your future self as early as possible, says Carstensen. Researchers at Stanford’s Center on Longevity emulated this experience by putting students in a virtual reality lab where they could meet avatars that looked like them at their current and their older ages. Afterward the researchers asked the students questions about retirement planning. The results were arresting: Those who engaged with their older avatar selves planned to save twice as much for retirement as those who avoided them.
As people approach or transition into retirement, another common hurdle emerges. Psychologists call it loss aversion. “Over the years, as money has gone into your retirement account, you’ve hopefully made a point of not touching it,” says Eric Gold, a behavioral economist who studies the psychology of financial decision making at the Fidelity Center for Applied Technology. “But when you retire, all of a sudden you need to write a check out of that account. You wouldn’t think that this would be a problem, but it is. Spending your retirement savings isn’t an easy thing to do. People fear the unknown and they fear loss. It can make them feel anxious.”
Imagine your future
To succeed in the transition from work to retirement, it’s critical to imagine your future life as realistically as possible. What is it you really want to do? Perhaps it’s travel, or moving to a warmer clime or closer to your grandchildren. Perhaps you dream of a second career. Whatever it is, give yourself the time to envision it, to own it. Once that future self begins to take shape in your mind’s eye, the planning process becomes easier, maybe even fun. After all, it’s your chance to take control and realize your dreams for life’s next chapter.
Once you can imagine that future, it’s easier to begin the planning process, which can help counter our natural fears of the unknown. And remember, it is a process, and one that will evolve with your goals over the course of your retirement. The key is taking the first step. “Set up an appointment with a financial professional, and tell yourself: 'I’m not going to leave that session until I have a discussion and come up with a plan,'" advises Carstensen. “Once you start that process, I think the odds of finishing it will go up really dramatically.”
Having a plan can also help you cope with loss aversion by letting you benchmark where you stand as you move through retirement. “People need guideposts,” says Carstensen. “If you have a plan that lays out where your accounts should be when you hit 70, 80, and 90, you can know if you’re on target, and not in a losing position. I think that’s very useful, both financially and emotionally.”
Ready to engage with your financial future? Here are the steps to take to get better prepared—and we can help.
Step 1—Develop a picture of your retirement.
Think about what a successful retirement means to you. What do you want to do? Will you work? Volunteer? Travel? What will retirement look and feel like at age 70, 80, 90?
Step 2—Translate your picture into estimated expenses.
Identify and divide your monthly expenses into “essential” (food, housing, clothing, health care costs, insurance, etc.) and “discretionary” (travel, entertainment, etc.). This way you can understand how much income you need to have versus how much you want to have.
Step 3—Understand your sources of retirement income.
List your expected sources of lifetime retirement income—such as Social Security, traditional pensions, and annuities. Compare your anticipated monthly expenses with your expected monthly income payments to see if you have an income gap to cover from your retirement savings. Also consider your potential for a long retirement, and whether you have enough from reliable or guaranteed income sources to cover your income needs throughout.
Step 4—Develop a strategy to generate lifetime income.
Build out a detailed retirement income strategy to generate the additional monthly income you believe you will need over your lifetime. That additional retirement income will typically come from a combination of regular withdrawals from your retirement savings and Social Security as well as traditional pensions and some type of guaranteed lifetime income product3 such as an income annuity4. How much monthly income will come from investment accounts and retirement income products will depend on your financial needs and product preferences.
As you move ahead...
We can help you make the transition from saving to spending by reviewing your current portfolio, creating an income plan, and developing an income strategy that suits your needs.
- Develop a retirement income strategy using the new Fidelity Income Strategy Evaluator.®5
- Complete a retirement income planning analysis based on your financial circumstances, taxes, and other financial goals with our Retirement Income Planner6 (log in required.)
- Learn more about investing for income in the Fidelity Guide to Retirement Income Investing.
- Speak to a Fidelity investment professional at 800-343-3548