Preface

Retirement Has Changed . Again

Retirement and retirement planning are changing . In the future, there will be more changes to retirement, and the changes will occur much more rapidly."

That was the opening of the first edition of The New Rules of Retirement. That opening couldn't have been more accurate, and it still applies today.

Though the first baby boomers hadn't yet reached age 65 when the first edition published (that didn't happen until 2011), they already had an impact on retirement and would continue to transform the post-career years. Other forces and trends joined with the boomers' reaching the silver years to break the old retirement rules. In only 10 years we had to adjust to these and other changes:

• Life expectancy, and therefore the length of retirement, steadily increases.
• Employers and governments continue to reduce benefits to older Americans, leaving retirees more and more on their own.
• Higher-income older Americans are receiving even less support as the government programs become more means-tested.
• Income and estate tax laws changed significantly, requiring updates to plans.
• The nontax factors in estate planning became more prominent and were revised and updated.
• The Affordable Care Act of 2010 introduced many changes to medical insurance and benefit plans, including changes to Medicare.
• Long-term care insurance underwent a couple of revolutions, with both good and bad consequences for retirees.

Of course, few people expected the turmoil in the economy and investment markets and how they would affect retirement plans. The financial crisis of 2008 affected the economy more adversely than any event since the Great Depression of the 1930s. The downturn in the investment markets marked the second decline in the major stock market indexes of more than 50 percent in less than a decade. The Federal Reserve brought interest rates to near 0 percent in response to the crisis, changing the investment plans of many people who were in or near retirement.

The most important lesson from more than a decade of change is: Retirement has changed and will change again.

You need to expect change. Your plans need flexibility, and you need to be ready to adapt and adjust.

Yes, you need a plan for retirement. You also need to realize that it is only a plan. It isn't set in stone, and it isn't a blueprint for the future from which you shouldn't deviate. A plan is based on assumptions about the future. You'll estimate inflation, interest rates, investment markets, the tax law, medical insurance, and more. Reality rarely will match all the assumptions or even come close. Some assumptions will be on target. Others will be a little off the mark, while still others won't even be close.

Plans need to be reviewed and adjusted. When you are in or near retirement, plans need to be reviewed annually. You don't want to review and change plans too frequently, because then you'll be responding to each little change in the investment markets. Regular reviews, however, mean only minor changes in your retirement plan can keep you on track. When too much time passes between plan updates and reviews, then you're likely to need major upheavals to put a plan back on track.

New Help for Retirement

Perhaps the most important change in retirement planning in the last decade is the fresh focus of professionals and academics. When I prepared the first edition of this book, few financial professionals or academics addressed the issues of Americans in or nearing retirement. They were still concerned with helping younger people maximize the accumulation of wealth. They largely neglected the needs of those who were past the accumulation phase of life and were in that post-career spending, or decumulation, stage of life.

Most of those who did offer advice for retirees relied too often on rules of thumb, intuition, and shortcuts to make recommendations. Only a few of us spent the time to create and analyze data to make recommendations. When we did, as readers of the first edition learned, the best actions often were counterintuitive. The rules of thumb and short cuts often led to recommendations that either made sense only in the past or that didn't stand up to analysis.

All that has changed. Now, there is a fairly robust collection of academics and financial professionals vigorously addressing the needs and concerns of older Americans. They use detailed research, data, and analysis to demonstrate the results that would occur from taking different actions under different circumstances. That means retirees and their advisors can spend more time analyzing individual situations and less time constructing models and data. It also means that the problems of retirees benefit from the attention, experience, and intellectual capital of a large number of professionals instead of only a few.

A related change is a new focus on strategies for generating reliable streams of income and cash flow in retirement. Until a few years ago, almost all investment research was geared toward maximizing long-term total returns. With the aging of the baby boomers, there's a realization that a large number of people no longer are interested in total returns. They're interested in making their wealth last, keeping it safe, and generating reliable income to ensure they can pay their expenses for an indefinite period. "Keep my money safe and pay me income" is the new Holy Grail of investing. It is receiving attention from major financial firms, academics, and a range of financial professionals.

In short, those in or near retirement have a lot more intellectual support than they used to, and it will improve retirement advice and outcomes. This intellectual support wasn't available until only a few years ago. Your retirement will be better because of the ideas and research generated.

The Retirement Process

For the first generation or two of American retirees, retirement was an event. A person reached a certain age, usually 65, and then stopped working. Retirement usually was filled with leisure pursuits: travel, recreation, spoiling the grandchildren, and similar activities.

While that model of retirement still exists, more and more Americans are shifting to different retirement models. The old model simply isn't appropriate for many of us.

Extending Careers

One emerging retirement model is to work past the age of 65. There are a number of reasons people do this.

German Chancellor Otto van Bismarck is said to have originated the practice of retiring at age 65 when he created the first old-age social insurance program in 1889. The U.S. Social Security Administration on its website disputes that this was the primary influence on the adoption of 65 as the first full retirement age in Social Security. The SSA points instead to an existing practice of designating age 65 in the U.S. private sector and state retirement systems, as well as actuarial data generated by the government, as the reasons age 65 was adopted.

Whatever the reasons for establishing 65 as the typical retirement age, they don't apply today. People live longer than they did in 1889 or 1935. Age 65 no longer is particularly old and people can live long beyond that, as we discuss later in this book. Many Americans at age 65 are relatively healthy and active. They don't want to stop working.

Research indicates there are many benefits to continuing employment. Mental and physical health often are maintained better with the regular social contact and structure that are part of steady employment. Work also gives a sense of purpose, which is essential at every age.

Of course, many people plan to continue working beyond 65 for financial reasons. The financial crisis of 2008 was a setback to many retirement plans, causing some retirees to seek to return to work while many preretirees began making plans to extend their careers. Since 2008, numerous surveys of Americans ages 40 and over found that many of them plan to continue working longer than they initially planned in order to increase their nest eggs.

Of course, work in retirement doesn't have to be compensated. Volunteer work provides many of the nonfinancial benefits of paid work. Volunteering also can provide psychic income and a sense of purpose because you are contributing to a cause that is important to you.

Keep in mind that retirement age isn't always a matter of choice. About half of retirees report in surveys that they didn't retire when they initially intended. A small percentage of them worked longer than planned, either because they liked what they were doing or needed the money. But most report that they retired earlier than they planned. Only a few retired early voluntarily and because they reached their financial goals. Most retired early involuntarily. Health reasons are a major reason for early retirement. People experience illnesses, injuries, or chronic conditions that make it difficult for them to continue their careers. Others retire early because they lost their jobs and couldn't find satisfactory new positions. After searching for a while, they left the labor force.

Retiring later is a model used by a growing number of people who still are planning and have a choice about when to retire.

Phased Retirement Is Here

A second retirement model growing in popularity is not to retire at all, at least not before health requires it. Leaving a long-time employer and settling down to a few years of travel, relaxation, or just sitting...