By Nicholas Haberling

Retirement planning would not exist without the field of medicine. In the second half of the 19th century, doctors began to make progress in treating traumatic injuries, infections and disease. By the early 20th century, progress against ailments that would have killed people in their youth or middle age, introduced a challenge humanity had never faced: How do we take care of a large population that can no longer work?

This challenge was met with the development of new tools such as pension plans and 401(k)s, as well as new social contracts such as Social Security. However, when we look to the future, will the retirement solutions of the 20th century be enough? To help us determine the stability of our own retirement plans, it can pay dividends to reflect on the opportunities and challenges the future presents.

Implications of longer life spans

When the Social Security Act was passed in 1935, the U.S. life expectancy at birth was 60, while you could claim your Social Security benefits at age 65. Since then, the U.S. life expectancy has risen to 76 years. To meet this increase in life expectancy, Social Security has become only one of a handful of components in many retirement plans, with 401(k)s recently taking precedent over pension plans to supplement a retiree’s Social Security income.

With today’s medical advances, it would not surprise me if a large portion of children and those just now entering the workforce live into their early and late 90s. If future employees continue to retire at age 65, this means Social Security, pensions and 401(k)s will have to support a longer retirement than initially planned. Even If Social Security benefits remain the same, retirees will need a larger 401(k) balance to cover the additional years of life expectancy. To achieve that larger 401(k) balance, people will need to have a higher savings rate throughout their working years.

We also need to consider the role “healthspan” plays. The term is relatively new but the concept is familiar for those of us who have watched a loved one deteriorate over a long period of time. While lifespan measures time from birth to death, healthspan measures from birth to the onset of chronic conditions that significantly degrade one’s quality of life.

Simply put, if lifespans extend but healthspan does not, we’ll see significant cost increases for both individuals and society.

 Potential policy changes

The Social Security Board of Trustees has signaled the Social Security Trust Fund will be depleted by 2034, and that continuing income will only be able to pay 80% of program benefits. There are a lot of options Congress can review to prevent that from happening, such as increasing the age of eligibility for future recipients, increasing payroll taxes and raising the maximum wage for payroll taxes. All of these have their own pros and cons.

What interests me is that we are experiencing this problem when life expectancy for the average American is 76.

Now let’s add another 10 years to life expectancy. Will there be a societal desire to pay more in Social Security taxes to help provide for those additional 10 years? Will we see an increase in public long-term care programs such as the one Washington state implemented just a few years ago?

Looking more near term, will Americans accept higher taxes in 2034 to preserve Social Security benefits for our present life expectancy? If we, as a country, decide not to maintain the present level of benefits, then workers will need to make up for the decline in Social Security benefits by increasing their savings rate throughout their life to maintain the same lifestyle.

Changing working norms

This sounds negative so far. Potential benefit cuts, tax increases to maintain benefits or a higher savings rate that detracts from personal discretionary spending. There is a bright side though.

Covid-19 forced businesses to adapt and adopt technology solutions that had been sitting on the sidelines for years. Remote and hybrid work were two such adaptations that revealed some careers don’t need to be in the office each day.

The post-pandemic economy also revealed a tighter than expected labor market. These factors have produced a very real need for skilled employees even if they are of retirement age and only wish to work in a part-time capacity.

The ability to work longer full time or in a part-time capacity means that a retiree does not have to draw as heavily from their investment portfolio to support their lifestyle. Therefore, this means they don’t need to maintain a higher savings rate throughout their life to match increases in life expectancy or public benefit declines.

Implications for today 

The objective of thinking about the future is to determine if there are any implications for today. The current crop of children may achieve an average life expectancy of 90, but what does that mean for you? If your family has a history of individuals living past their 90s, your retirement plan needs to incorporate that possibility. Ditto for considering healthspan versus lifespan.

Maybe your family has a history of living to 90 but the last six years are spent in an assisted care facility. That’s a very different end-of-life spending pattern compared to someone who lives to 90 but deteriorates over a period of six months.

In summary, the future is not set and fields as vast as medicine and public policy can have a profound impact on your retirement plan.

Nicholas Haberling is a partnership advisor at Community First Bank & HFG Trust in Kennewick.