Retirement planning is a relatively new concept in the financial world. In fact, it didn't even exist 100 years ago.
In traditional cultures the elders were considered productive and respected members of society until their death. They were highly valued for their accumulated wisdom, insight and experience. Nobody considered "retiring" them because they were integral to how traditional society functioned. Sure, their roles changed as they aged, but they always had an important role to play.
As industrial society developed people continued working until their health failed. Life spans were simply too short to support an extended period of leisure and there was no mechanism to financially support life without income because no pension system existed. The concept of retirement planning hadn't taken form yet.
All that changed in 1935 when Social Security was created. Shortly thereafter many companies and governments began offering pension plans to supplement Social Security. Around the same time average life spans were beginning to extend beyond 65 years. This combination of factors - increasing longevity and financial programs that provided resources to support a period of leisurely old age - created the first phase of retirement planning.
Surprisingly, the beliefs that launched the first phase of retirement planning still carry through to this day. The idea that people should work 40 years until the magical age of 65 so they can enjoy a leisurely lifestyle in their elder years can be dated back to 1935 and the creation of Social Security. Prior to this time nobody thought a career was something you did for 40 years until you could relax and slow down. Nobody ever imagined having a vast segment of society (the elderly) living a leisurely lifestyle and providing no essential economic function.
But all that is changing again as a new phase of retirement planning is developing. The old concept of working like a dog for 40 years so that you can do nothing for the remaining 20-25 years no longer makes sense to many workers. They want something different that balances the two previous extremes of "work-till-death" and "do-nothing-after-65". This new idea of retirement focuses on life balance and fulfilment by blending career and retirement into hybrid alternatives such as phased retirement and second, less stenuous careers. This new retirement is being driven by several developments:
- Increasing Longevity:At the beginning of the 20th century life expectancy was 47 years and expanded to 63 years by 1935 when Social Security was created. Back then people didn't live long enough to worry about supporting themselves for a prolonged period of old age. By the end of the 20th century life expectancy had increased to 77 years and continues to expand making age 65 today like age 40 just one century ago. With the biotechnology revolution and improving health care many people can expect to spend as much time in retirement as they did in a career. That is a game-changing development.
- Pension Changes:The paternalistic days when employers provided a secure income for life through defined benefit plans are fading away. Defined contribution retirement plans such as 401(k)s are replacing the old-style pension plans because the financial cost and risk was too great for companies to shoulder. Instead, they've passed that risk and responsibility to your shoulders. This transfer of risk and responsibility for saving for retirement was another game-changing development.
These two factors combined cause the next generation of retirees to face a longer and less financially secure retirement. A tremendous new burden has been placed on their retirement savings because living longer requires greater savings to support more years of leisure, and reduced pensions increases the need for personal savings to make up for the fixed income shortfall. In short, workers today must save more money to fund a longer retirement than ever before in history.
The result is a difficult awakening for a generation of workers raised on the expectation that if they worked a full-time career until age 65 their financial needs in old age would be taken care of. For many people this is no longer true, and the response has been varied. Some have opted for second careers or phased retirement instead of complete work cessation. Others have chosen to retire abroad in pursuit of a lower cost of living or pursue entrepreneurial dreams in an effort to create additional income.
While the response to the new reality of retirement has been varied, the experience that retirement planning has entered a new phase of history is widespread. The old model born in 1935 was simple: accumulate enough wealth during the first half of life so that you could spend it all in the second half of life. Earn everything now because you will earn nothing later. This worked from 1935 until recently because life spans during retirement were short enough that savings goals, inflation risks and other problems facing retirees were manageable.
The new retirement is different. It is entirely possible to live 30 years or more in retirement which magnifies the impact of various risks including actuarial risks (outliving your savings), investment risk, and inflation risk. In the days when retirement durations were 10-15 years, inflation and investment return were merely inconvenient details because you essentially spent your savings proportionately over your expected remaining life.
However, the new retirement doesn't allow such simplistic planning because 30 years or more of spending principal is tantamount to financial suicide. What happens if you live 10 years longer than expected? What happens if inflation is 2% higher or your return on investment is 2% lower? It could mean financial catastrophe because small percentage changes compounded over long periods of time cause huge changes in your retirement savings. Problems that were mere details when you lived just 10-15 years in retirement force an entirely different approach to retirement planning when the time period extends out to 30 years or more.
In summary, we have reached a new age in the history of retirement planning. Increasing longevity has created the potential for 30+ non-earning years thus requiring more savings than most workers can amass. Only the wealthiest few are able to support 30+ years of leisure while enduring the ravages of inflation and health care expenses without augmenting their savings with earned income.
We have travelled full circle in the 100 year history of retirement planning from no leisure to full-time leisure and are now landing somewhere in between the two extremes. Financial planning is responding with a more dynamic model that includes the traditional elements of savings, pension, social security, and healthcare, while adding new complexities to supplement this old foundation with features like defined contribution plans, second careers, and part-time income.
The past 100 years of retirement planning has been a progression of complexity that promises to continue well into the future.
About the Author: Todd Tresidder writes about retirement planning, wealth building and investment strategy at financialmentor.com. His new ebook How Much Do I Need To Retire reveals the little known problems hidden behind retirement calculators and provides the solutions you must have to retire with security and peace of mind.
