Stop! Why Your 401(k) Won’t Cut It in 2024’s Retirement Revolution!

Just a heads-up — relying solely on your 401(k) for retirement might not be enough.

A recent report from an investment firm called Principal (called The Future of Retirement), found that a lot of retirement savings plans have this issue.

They dug into how retirement will shift by 2030 as Generation X (those born from the mid-1960s to early 1980s) starts retiring. This generation might have more active lives but may not have as much saved up for retirement compared to their Baby Boomer and Silent Generation parents. That’s why Principal is expecting changes in how we all plan for retirement in the future.

It could be a good idea to talk with an investment advisor, portfolio manager about creating a projection that takes into account the upcoming changes in the world of retirement planning.

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Don’t Depend Solely on Your 401(k) for Retirement:

One big change they’re expecting is that 401(k) plans might not be as strong or well-funded. Generation X, the first group to experience the full 401(k) program since it began in 1980, seems to be struggling with this. Reports suggest they don’t have enough saved in their 401(k) plans for a comfortable retirement. This financial reality is reshaping how this generation might approach or even achieve retirement.

This isn’t breaking news in the world of retirement planning. For years, experts have warned that the 401(k) system might not adequately prepare people for retirement, especially because it’s heavily influenced by the unpredictable market. Historically, the 401(k) was meant to complement other retirement plans, not serve as the sole solution.

Generation X, being the first ones to fully experience the 401(k), is facing the consequences according to a report from ASPPA, but younger generations like millennials and Gen Z’ers in the workforce are encountering similar challenges. Post-1980 generations generally haven’t saved enough for retirement, and it’ll impact their retirement lifestyles.

For those planning their retirement, here’s the gist: Don’t solely rely on your 401(k). If possible, diversify your investments and portfolios. Consider delaying retirement to boost your Social Security benefits. If you’re not saving enough, act promptly. Keep a close eye on your retirement plans, as depending solely on the set-and-forget model of a 401(k) might not be sufficient.

Consider a Comprehensive Approach to Retirement Planning Beyond Just Your 401(k)

Another significant shift involves the focus of retirement planning. Currently, Principal notes that the emphasis is primarily on getting individuals enrolled in retirement plans and encouraging them to maximize their personal contributions. While this is a good starting point, their recent study reveals a consensus among financial experts and employers that the conversation around retirement planning needs to shift toward an outcome-driven perspective.

Instead of merely enrolling and contributing, the discussion should center around what a comfortable retirement means for each individual and how to make that vision a reality.

Understanding what constitutes a comfortable retirement is essential. For instance, someone envisioning an active urban life will require different financial plans compared to someone dreaming of a quiet retreat in the countryside. Beginning this planning process early is crucial for a successful retirement.

Although Principal anticipates this change in the coming years, there’s no need to delay. Individuals and investors can begin this process right away. Take a look at your life, aspirations, and happiness, and start crafting a detailed plan for your envisioned retirement. Consider questions like where you want to live, what you want to do, and what your mental, physical, and financial needs will be as you age.

Once you have a clear understanding of the life you wish to fund, you’ll be better prepared for your retirement journey.

Can You Consider Phased Retirement?

One significant shift in retirement involves the idea of delaying retirement. For some, this decision is based on financial necessity — continuing to work to cover living expenses. For others, it’s a lifestyle choice, enjoying their career or the routine of working and not feeling ready to fully retire. Principal anticipates this trend to gain momentum.

The Principal report indicates that “three in 4 financial professionals and employers” foresee a phased approach to retirement by 2030. This phased retirement could manifest in various ways: from reducing work hours and pay gradually until complete retirement, to taking extended breaks to travel, write, volunteer, then returning to full-time work until the next retirement phase.

This shift would significantly alter the landscape of retirement. Financially, it would involve taking retirement account distributions while still working. Practically, it would require employers to be open to part-time or intermittent work for older employees.

For workers, phased retirement could have implications. Delaying retirement might limit younger colleagues’ chances for promotions and salary growth. Planning for this reality is crucial, understanding the potential impact on their career advancement at companies offering phased retirement options.

For those planning their retirement, observing this trend is crucial. While phased retirement is currently a concept, it could bring significant benefits to longer-living generations. This aligns with comprehensive retirement planning. You might consider or need partial retirement, so it’s essential to plan ahead, setting the stage with your finances and potential employers.

Desirable Retirement Benefits Beyond Traditional Employment

Principal’s research highlights a conflict concerning retirement benefits for non-employees between financial professionals and employers. The recent surge in the utilization of gig and contract workers by corporations has been notable. Companies often opt for these workers due to their flexibility, utilizing their on-demand services. However, sometimes these contract workers end up performing tasks similar to employees, a practice termed “misclassification.”

Despite the reasons behind this, such workers typically miss out on benefits, including access to retirement accounts. Principal’s study indicates that nearly three-quarters of the financial industry believe employers should provide retirement benefits to contract workers. This move could potentially enhance plan participation, especially considering that 401(k) plans have more favorable terms than IRAs, according to the IRS.

However, the outlook for contract workers regarding this is uncertain. Although 56% of employers supported this notion in Principal’s survey, companies often opt for contract workers due to cost efficiencies. 1099 contractors handle their FICA taxes and manage their own retirement funds. This translates to significant savings compared to W-2 employees, which is a major reason companies rely on such contractors. It’s improbable that companies will voluntarily forgo these savings by extending access to 401(k) programs.

At the End of the Day..

As Generation X nears retirement, they bring forth a unique set of demands and hurdles for the retirement landscape. Despite being healthier and more engaged, they face financial challenges with less robust savings compared to the Baby Boomers. This shift in the upcoming retiree demographics will reshape our traditional notions of retirement.

Have Questions? Contact us

We’ve assisted our clients through every stage of life. Even when you’re not aware that something might impact your financial future, it likely will to some extent. Engaging in a conversation with your investment advisor about any financial changes is an excellent approach to keeping your financial goals in focus.

If you’re in the process of planning a cross-border move or have already relocated from the US to Canada and seek assistance in streamlining and enhancing your financial strategies, we’re here to help. We have the expertise in cross-border wealth management. Don’t hesitate to reach out to us — we’re committed to providing tailored solutions for your cross-border financial needs.

For more information or to connect with me, you can reach out via email at macekadmin@iaprivatewealth.ca or get to know me better by exploring my engaging video content on YouTube https://www.youtube.com/@joemacek.

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Don’t hesitate to reach out today at 1–888–324–4259 to discover more about how we can help you achieve your investment milestones.

Joe A. Macek, FMA, CIM, DMS, FCSI

Investment Advisor, Portfolio Manager

iA Private Wealth | iA Private Wealth USA

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