How To Prepare For Disruptors To The Retirement Savings Industry In 2024 And Beyond

Do not count on your 401(k) plan alone.

This weakness of many retirement portfolios is just one of the findings from a recent report on the state of retirement in America released by investment firm Principal. Called The Future of Retirement, this research looks at how retirement will change by the year 2030, as Generation X, those born in the mid-to-late 1960s to the early 1980s, begins to hit retirement age.

Older, more active, but with weaker retirement accounts, the coming generations will look entirely different from their Baby Boomer and Silent Generation parents. So it may not be surprising that Principal expects people to change how they approach retirement in the years to come.

Consider working with a financial advisor to build a plan for future developments in the field of retirement planning.

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Avoid Relying Heavily on a 401(k) Account

Among the biggest changes that they forecast are weaker or underfunded 401(k) plans. The 401(k) program began in 1980, making Generation X the “first full 401(k) generation,” the report states. And it does not seem to have worked.

Generation X is light on retirement funds. As a cohort, they simply don’t have enough in their 401(k) plans to afford a comfortable retirement, according to a report from ASPPA. This is a financial reality that will redefine how – or even if – members of this generation get to retire.

This is not news to anyone who has studied the retirement landscape. For years now, economists and policy experts have warned that the 401(k) program has ill-prepared Americans for retirement, particularly by linking this essential issue to the ups-and-downs of the market. And economic historians will be quick to point out that, in part, this is because 401(k) accounts were always intended to supplement other retirement plans, not replace them altogether.

As the first full 401(k) generation, Gen Xers are the guinea pigs, but millennials and working age Gen Zers show the same problem. The post-1980 generations just don’t have enough saved for retirement, and their retirements will reflect that fact.

For people planning their own retirement, the takeaway is this: Do not count on your 401(k) alone. If at all possible, supplement that account with other investments and portfolios. Try to retire later, rather than earlier, to maximize your Social Security earnings. Notice it early if you don’t make enough to fund your retirement accounts. And actively monitor your retirement plans, because just counting on the fire-and-forget model of a 401(k) does not appear to be enough.

Focus on Holistic Retirement Planning

Another major change is the nature of retirement plans. Right now, Principal mentions, retirement planning focuses mainly on enrollment. Employers and retirement plan organizers focus on getting employees to participate in retirement plans and maximize their personal contributions.

This is good, but it should be considered a place to start. Now, their study finds, both financial professionals and employers agree that retirement planning should be discussed from an outcome-oriented perspective. Individuals and employers should talk about what a comfortable retirement looks like for any given individual and what they will need to make those plans a reality.

That, in turn, will help someone plan for their own retirement finances. Someone who wants to live an active life in a large city, for example, will need more money than someone who wants to slip off to a cabin in the woods. These people will need to make different plans, and the earlier they can start that process the better. 

Yet, while Principal expects this change in years ahead, there’s no reason to wait. Individuals and investors can do that right now. Look at your own life and happiness and begin to create a specific plan for what you want your own retirement to look like. What will you do? Where will you live? As Principal writes, what kind of “mental, physical and financial needs” will you have as you age? And what will you need to put in place to achieve those goals?

Once you have a sense of the life you want to fund, you will have a much clearer picture of how to prepare for retirement.

Is a Phased Retirement an Option?

Another major change in retirement is deferring retirement. For some, this is an financial necessity. Without enough money to afford a retirement, they continue working to pay the bills. For others this is a lifestyle choice. They enjoy their chosen career, or even just the activity of going to work and aren’t ready to wind down yet. Principal expects this trend to gain steam.

“Three in 4 financial professionals and employers,” the Principal report says, “think that by 2030 participants will be able to take a phased approach to retirement… Some see a phased retirement as continuing to work but reducing hours and pay until they take full retirement. Others see it as taking longer bouts of time away from work, such as six months to travel, write a book, or volunteer and then coming back again to work full time until the next retirement phase.”

This would represent a sea change in how retirement operates. Financially, it would mean taking consistent retirement account distributions while still employed. Logistically, it would require employers to embrace the idea of part-time and intermittent older employees.

For workers, phased retirement would have several ramifications. First, when older workers delay retirement, even if they swoop in and out of their jobs, their younger colleagues receive fewer promotions and slower wage growth. Workers may need to plan for this, understanding that it may be more difficult to advance their own career at a firm with generous phased retirement options.

For someone planning their own retirement, it will be important to keep an eye on this trend. Currently phased retirement is theoretical, but it offers potentially significant benefits to generations that are living longer, healthier lives. This would go hand in hand with holistic retirement planning. You may either want or need partial retirement. If so, it’s important to begin figuring out what that will look like in advance, when you can begin to lay the groundwork with your own finances and with any potential employers.

Aspirational Non-Employee Retirement Benefits

Principal’s study also cites tension over non-employee benefits between financial professionals and employers. Recent years have seen a huge rise in the corporate use of gig and contract workers. In many cases, companies use them for their flexibility, taking advantage of the ability to order up products or work on an as-needed basis. In other cases, companies have a contract worker do the same job as an employee through a process known as “misclassification.”

Regardless of the underlying reason, these workers do not receive benefits, including access to a retirement account. Principal’s study finds that almost three-quarters of the financial industry thinks that employers should extend retirement benefits to their contract workers. This could create broader plan participation, especially since the IRS gives 401(k) plans far more generous terms than IRAs.

Contract workers should not plan for this. 

While 56% of employers agreed with this idea in Principal’s survey, companies use contract workers specifically because of their cost advantages. A 1099 contractor pays their own FICA taxes and funds their own retirement account. Those savings are considerable compared with a W-2 employee, which is why many employers rely on contractors in the first place. It is unlikely that companies will unilaterally waive those savings by expanding access to 401(k) programs.

Bottom Line

As Generation X approaches retirement age, they will present an entirely new set of needs and challenges for the retirement industry. Healthier and more active than ever, but with weaker savings than the Baby Boomers, the next wave of retirees will change how we think of retirement. 

Retirement Savings Tips

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Check out SmartAsset’s retirement calculator to get a quick estimate of how you’re doing in preparing for your retirement.

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