Savings and Income

From a financial perspective, the working years prior to retirement are the time for accumulating wealth, so that when seniors retire and enter a wealth expenditure period, they will have sufficient income to choose their desired lifestyle for the rest of their lives, and perhaps have remaining property to pass on to their heirs.

Before retirement and to some degree afterwards, financial planners advise building wealth through some combination of assets including cash savings, investments, employer-sponsored retirement plans, individual retirement accounts, and real estate-and to protect wealth by purchasing insurance and taking other steps to manage tax liabilities and the cost of risks such as possible disability or incapacity.

The amount that seniors have accumulated in personal savings (cash and investments in stocks, bonds, mutual funds, qualified retirement plans, real estate, and other property) determines the quality of lifestyle they can afford during retirement-and for how long.

Adequacy of Personal Savings

If seniors find it challenging to save as much as they would like for retirement, they are not alone. There is significant concern among financial experts that the low personal savings rate in the United States will not create the amount of retirement income needed by today’s seniors and baby boomers who will soon retire.

Seniors may hesitate to save and invest when interest rates offer relatively low returns or the stock market performs poorly. But regardless of market conditions or interest rates, not saving for retirement is usually a serious mistake.

According to a survey by the Consumer Federation of America and Primerica (Gerencher, 1999), “More Americans believe they have a better chance of making half a million dollars through the lottery than by saving and investing.” The survey substantiated the following:

  • Most middle and low-income groups fail to save and have accumulated little wealth other than home equity.
  • The average household has a high rate of debt and low level of assets.
  • Most respondents overestimated their assets and the assets of others.

This overestimation may contribute to the declining savings rate. The researcher who conducted the survey encourages the education of middle-income earners about savings, mutual funds, and other investment tools. Motivating clients to save before and-if possible-during their retirement years may be among the most valuable services a financial planner may provide.

Interestingly, although attitudes and beliefs certainly play a strong role in how much Americans save, the ability of many individuals to save for retirement is also affected by their increasing longevity.

Effects of Longevity and Inflation on Retirement Savings

A person born in 1900 could expect to live to about age 47. A persona born in 2001 can expect to live to about age 77-a 30-year increase in life expectancy in little more than 100 years. Although we cannot predict what will happen in the next 100 years, it seems safe to say that continued advancements in medical care should cause overall life expectancy to continue to increase (United States Department of Health and Human Services, 2003).

Increasing longevity, combined with inflation, means that middle-class seniors are likely to require retirement nest eggs of $1 million or more to maintain financial independence in their current lifestyles during extended years of retirement. Understanding the impact of inflation and implementing savings and investment strategies to counter its effect are crucial to successful retirement planning. (You should educate your senior clients or refer them to qualified financial professionals who can help them implement strategies to beat inflation’s erosion on retirement dollars.)

New Views on Retirement

In addition, increasing longevity has changed our society in two fundamental ways that affect individuals’ abilities to save for retirement (Cutler, 2002):

  • Balance: the amount of time for accumulating wealth to fund retirement is shorter
  • Complexity
    • cost of new and expanded family responsibilities
    • shift of responsibility to individual employees to make investment decisions


In financial planning, the world balance means the ratio of time spent accumulating wealth versus the time that wealth is spent. Today we see shorter accumulation and longer expenditure phases because of increasing longevity, prosperity, and early retirements. Individuals are under pressure to create enough financial resources during shorter working years to fund longer and more active retirement years.


Personal savings behaviors are significantly affected by:

  • increased family responsibilities that may span several generations;
  • the shift from defined benefits to defined contribution retirement plans.

In the family structure, increased longevity has created more financial responsibilities for individuals who are sandwhiched between children or grandchildren in college and aging parents or grandparents. The expenses of added family responsibilities often affect these individuals’ abilities to save for their retirement, and may require them to use portions of their existing retirement assets such as stocks, bonds, and mutual funds to pay for family memebers’ education, care giving, health , and medical needs. Also, when retirees do not have enough income to afford their desired lifestyles-including responsibilities such as care giving or supporting grandchildren-if they are still young enough, they may start a second career or take part-time work.

In the investment area, an employer-sponsored, qualified retirement plan such as a 401(k) or 403(b) is often an individual’s largest and most important asset, particularly for middle and low-income individuals. These plans are defined contribution plan, and most employers offer some version of them. They place the responsibility for building adequate retirement assets on individual employees, rather than employers. Individual employees must decide if they want to participate in the employer-sponsored plan, and if so, how much money they want to contribute, and to which type of investments (equities, bonds, mutual funds, etc.).

This is a major change from the days when most employers offered pension (defined benefits) plans to employees that the employer funded, invested, and then, from the profits, paid a guaranteed amount of retirement income to their retired employees.

In addition to a change in the proportion of wealth accumulation and expenditure periods, and the changes in family needs, retirement includes different phases. Understanding the phases of retirement can help you understand the changes that your senior clients go through as they adjust to this period in their lives.

Critical Period for Creating Retirement Income

The most critical period for building personal savings for a successful retirement is that Michael Stein refers to as the Decision Decade-the five years immediately before and the five years immediately after retirement (Stein, 2000).

Five Years before Retirement

Individuals who are preparing for retirement are more financially comfortable than they’ve ever been. Salaries are at a peak, college tuition are generally a thing of the past, often the mortgage is paid, and with children out of the home both spouses may be working. Available funds may increase as much as 5 to 10 times during the five years immediately preceding retirement (Stein, 2000). But instead of using these additional funds to fatten their retirement accounts, couples often expand their lifestyles, consuming additional dollars and increasing their expenses, which must be paid for when they retire.

Five Years after Retirement

In the first five years after retiring, the couple has time on their hands to continue expanding their lifestyles. Because these individuals were at the highest earning level of their lives just prior to retiring, they are used to spending. They’ve arrived. No more need to save. Run and spend. Numerous ads target the 50-and-older market, urging people to buy luxury automobiles, second homes, time-shares, and vacation properties; to cruise to exotic locales and take luxurious vacations; to trade old furniture for new, higher-quality furniture-the list goes on.

Although there may not be anything wrong with an increased level of spending as retirement approaches, doing so frequently creates real problems after retirement and can compound the problem of not having enough than it is to live on a learner budge. But once money is spent, it will never be available for future income needs. Also, credit card balances eventually must be repaid.

The Decision Decade could consume tremendous amounts of money and further expand the base of future retirement expenses unless seniors are careful in their spending habits. Stein’s comments reinforce the significant differences in financial needs at each phase of retirement. The patterns he describes strongly suggest that you encourage clients to be more aggressive in continuing retirement savings and more realistic in examining the long-term effect of lifestyle decisions on retirement expenses.

Strategies to Address Seniors' Financial Concerns

Income Group Key Financial Concerns Managing Risks to Current Income and Assets Managing Taxes

Managing Investments: The Growth of Assets and Income

High Net Worth:

$ 1 million or more in assets

  • managing taxes
  • maintaining and growing wealth
  • sharing wealth with heirs, charities, and others
  • private health insurance
  • Medicare
  • Medicaid
  • Social Security disability benefits
  • long-term care insurance
  • personal savings
  • life insurance: term, permanent (whole)

Applies to both high net worth and middle income groups

  • tax exemptions and deductions

Applies to both high net worth and middle income groups

  • self-owned businesses
  • qualified retirement plans: IRA, 401(k), 403(b), etc.
  • annuities
  • Social Security retirement benefits

Middle income:

$ 30,000-$80,000

annual income (not assets)

  • outliving assets
  • generating ongoing retirement income
  • financially supporting family members
  • maximizing income from multiple sources
  • self-owned businesses
  • qualified retirement plans: IRA, 401(k), (403)b, etc.
  • annuities
  • pensions (to some degree)
  • Social Security retirement benefits
  • delayed retirement
  • second career or part-time employment
  • reverse mortgage
  • alternative sources of income*

Lower Income:

$ 30,000 or less annual income (not assets)

  • paying for the basic necessities of daily living
  • personal savings
  • Medicare
  • Medicaid
  • Social Security disability benefits
  • life insurance: term, permanent (whole)
  • Social Security retirement benefits
  • delayed retirement
  • second job or parti-time employment
  • reverse mortgage
  • qualified retirement plans (typically the few who could afford to contribute while working)
  • pensions (to some degree)
  • alternative sources of income*

*For example: SSI, Veterans benefits, Medicaid beneficiary, tax credits, etc.

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved.