Rethinking retirement: Income needs to be the outcome, as America is hitting ‘peak 65’

By the end of today, about 11,200 Americans will turn 65, and more than 4.1 million people will reach that milestone each year through 2027.

“By the end of this decade, there will be more people over age 65 in the United States than under the age of 18,” said Ken Stern, founder and chair of The Longevity Project. “As recently as 1990, there were twice as many people under age 18 as over age 65. The challenges are significant. The demise of defined-benefit retirement plans has shifted the responsibility for managing income to retirees. Roughly 50% to 60% of retirees now are deemed to be at risk of not being able to retain their standard of living throughout retirement.”

Stern moderated “Peak 65,” an April 15 webinar that examined the implications of what some retirement experts call Peak 65.

“Starting this year in 2024 through 2027, there are both micro-implications for retirees and macro-implications for fiscal issues when we think about how we fund Social Security, Medicare and retirement in general,” said Jason Fichtner, executive director of the Alliance for Lifetime Income’s Retirement Income Institute. “This becomes a window of opportunity to talk about how we help those who are 65 today, Gen Xers who are getting near retirement and millennials, because this also is a year of peak millennials. They are the largest generation, so the issues we are talking about for peak 65 and the challenges they have are going to be more magnified for those who are coming behind. We have a short window to solve these problems so people can make changes.”

The fact that many Americans are living longer only compounds the problem. “Longevity is the biggest risk in retirement,” said Bryan Pinsky, president of individual retirement for Corebridge Financial. “People often confuse longevity with the pure definition of how long you live. But longevity risk really is, ‘Do you outlive your assets and all of a sudden are in a place where you can’t afford the things that are important to you in retirement?’”

This risk is even greater for many women, who not only can expect to live longer than men but often earn less in their careers and may have taken time off to care for children or parents.

“There are something like 43 million adult women in this country who have never been married,” said Kerry Hannon, senior columnist for Yahoo Finance. “They face significant wealth gaps when they get to 65 and beyond. What that translates to is a real challenge for single women in particular.”

Most financial advisors are familiar with the metaphor of retirement security as a three-legged stool of Social Security, employer contributions and personal savings. But as Stern said, “that stool is looking a little wobbly today.”

Fichtner agreed. “Each leg of the stool was supposed to be about one-third of your income when it came to retirement,” he said. “Social Security is designed to be about 40% for the average American. You usually had a defined-benefit pension plan from your employer, and you had personal savings. Social Security is about 10 years away from trust fund insolvency – not bankruptcy, but insolvency, which means it can only pay out in benefits what it takes in in payroll taxes, or about 75%. If Congress does nothing, everybody will see a 25% cut by 2033 or 2034. The defined-benefit plan is now a defined-contribution plan. The employer still has a role, but it requires the employee to save on their own as well.”

As a result, it’s time for a paradigm shift. “What has shifted now is that we have to start thinking of income as the outcome in retirement,” Fichtner said. “People are used to getting a paycheck when they work and a pension when they retire. Now they have a 401(k), and millennials are not going to have a pension. We need to figure out how we are going to take those 401(k) assets and convert some or all of them into protected income so you still get your paycheck in retirement.”

Although this presents a challenge to financial advisors, it also can be a great opportunity.       “When you start working, you are told to save, save, save for your future,” he said. “Then you get to your magic number and we say, `have fun, you are on your own, figure out how to make this last,’ and people have no idea. As financial advisors, we have to change the narrative from the accumulation phase to the decumulation or distribution phase of your life.”

Related: Is retiring on $100,000 a year doable? What it takes to get employees there

Pinsky encourages advisors to tailor recommendations to each individual client. “Ultimately, each one of our retirements is going to be different from someone else’s,” he said. “Our financial situation, our needs, our wants, our desires are going to be different, so it’s important to think about that from your own perspective and talk with a professional to think through `what does my retirement look like, and what do I need financially support that retirement?’”

Given current trends, Peak 65 may only be the beginning of the time period when retirees will lean on advisors for solid advice. “The good news is that you are living longer; the bad news is that you have to pay for it,” Fichtner said. “My joke is that my goal is to live forever, and so far, it’s working. “