8 New Retirement Rules

Your retirement will be very different from that of previous generations.


The rules of retirement have changed over the past generation. Individuals must now take more personal responsibility for their retirement finances, even as life expectancies increase and personal savings rates remain low. "Each succeeding generation is looking at a less secure retirement, with today's seniors being the best off," says Mark Miller, publisher of RetirementRevised.com and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living. "This has to do with everything from the decline of defined-benefit pensions to the diminution of Social Security and health benefits, not to mention the worst economy since the Great Depression." Here are some key ways your retirement will be different from that of previous generations of retirees.

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Extended or second careers. Many people will continue to work past the traditional retirement age because they need the income and enjoy the social interaction and other benefits a job can provide. "Retirement has become a 20- to 25-year period that many people cannot afford, and it's just plain boring," says Ken Dychtwald, president of the consulting firm Age Wave and author of With Purpose: Going From Success to Significance in Work and Life. "They are going to be opting for a longer work life, both because they want the engagement and the extra years of earnings."

Less employer help. Employer retirement benefits have become considerably less generous over the past several decades. In 2010, only 20 percent of private-industry workers had access to a traditional pension that guaranteed payouts for life, according to the Bureau of Labor Statistics. In contrast, 59 percent of private-sector workers were offered a 401(k) or other retirement account, and 41 percent participated. "For some time now, the trend has been that individuals are going to be responsible for more and more of the financing of retirement," says Bob Carlson, editor of Retirement Watch and author of The New Rules of Retirement: Strategies for a Secure Future. "Corporate pension plans have been reduced and fewer employers are paying for retiree medical expenses." While private-sector traditional pensions are typically insured by the federal government, most 401(k) plans and retiree health benefits are not. "Even people who have been retried 15 or 20 years have seen their medical plan that is promised by the employer cut back or reduced," says Carlson.

Make your savings last. Individuals are now responsible for building their own nest egg and making sure that money lasts for an unknown number of years of retirement. You will be responsible for shifting your money into age-appropriate investments, while also earning enough return to make your money last for the rest of your life. Managing your own investments may require more vigilance than simply withdrawing 4 percent of your savings each year. "Your spending formula should be flexible, and vary based on investment returns and spending changes you have," says Carlson. "Look at your budget regularly and make adjustments on a regular basis to reflect the changes that have occurred."

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Manage your taxes. Not all of the money you've stashed in a traditional 401(k) and IRA is available for spending in retirement. Income tax will be due on each withdrawal. "People need to pay attention to the tax rules and master all the strategies for taking money out of an IRA," says Carlson. "Anything you can do to reduce taxes is going to give you more money to spend." Retirees need to space out withdrawals to minimize their tax bills and remember to take required minimum distributions after age 70½ to avoid a tax penalty. Also, consider pre-paying income tax on some of your contributions, using a Roth account to add flexibility and tax diversification to your portfolio. "One of the old rules of retirement was that when you went into retirement, your tax bill declines, but the idea that your taxes will fall in retirement no longer applies," says Carlson. "When you add up all the taxes you pay in retirement, it is going to be one of your top three expenses, and for some people it will actually be your biggest expense."