Conventional wisdom holds that 9 out of 10 (South Africans) will not be able to retire financially independent. I have never actually seen the research that underlies these figures – most of them seem to emanate from the insurance and asset management companies. Depending on which (marketing) material you read the number might differ slightly but they all agree on this – most of us won’t be able to afford the “best years of our lives”. So are we just not saving enough or is there something else fundamentally wrong with the status quo? In order to answer the question it is necessary to have a (quick) look at the history of retirement as we know it. In short, retirement was never meant to be the long unproductive period that it has come to be.
As a concept, retirement is a relatively new thing. Its roots can be traced to Otto von Bismarck and Germany in the late 1800’s where he introduced a disability insurance programme for anyone over the age of 70 (there were not many) and in reality it was just an attempt by him to retain the loyalty of the workforce. The first private pension fund was introduced around the same time by American Express in the US and shortly after this the first union pension fund was introduced. The uptake was initially slow but from 1910-1920 as favourable tax regimes were introduced the number of funds quickly grew to more than 200. By 1932 about 15% of the US workforce was covered.
Then came the “great” depression and in 1933 with 25% of the US population unemployed, 50% of the elderly living in poverty (many of the private pension funds collapsed) there was a growing call for the elderly to demand pensions from the government. They (the government) quickly responded and in a move that was mostly an attempt to maintain political power and control, FD Roosevelt and the new Dealers introduced the concept of enforced retirement. This was largely in an attempt to get rid of an ageing workforce and in doing so to make way for the young unemployed masses, thereby getting them off the streets and stop them from rioting as they had done in Germany and elsewhere. The plan to fund this was simple: get the younger members working and then use their taxes to fund the pensions of the older retired workers.
All that needed to be decided was the age of retirement. There were global precedents ranging from 60 to 70 (as well as the biblical notion of “three score and ten”). When they initially agreed on the age of 65, life expectancy in the US was around 63. In the 1930’s, if you reached 65 you were considered really old – kind of like today’s 95+ brigade. In reality, most people were set to die before they retired and the age was quickly reduced to 62 years. So, in theory at least, you retired at 62 and then spent a year in retirement getting your affairs in order before you then “checked out” for the last time.
Today, especially with the advancement of modern medicine, it is not uncommon to find people spending more years in retirement than they did working. Someone who retires today at 55 has saved for 35 years (max) and then possibly needs to fund the next 35-40 years from this saving. No wonder 9 out of 10 people will not be able to retire financially independent! It is not only that they have not saved enough but also that retirement was never meant to be that long. The odds are fully against us – how can you fund 30+ years (with all those deferred goals and with rapidly increasing medical costs) when you only have 30-40 years to save for it? Nope, I think we have it wrong and so do a growing number of well-respected financial planners.
But let’s go back to the early 1900’s for a bit. At that time there was a widely held view that the aged could add little value to society – part of this perception can be attributed to William Osler (so called father of modern medicine) who in his famous “fixed term” speech in 1905 stated that anyone over the age of 40 should be retired and that men older than 60 should be cholorformed. “Take the sum of human achievement in action, in science, in art, in literature – subtract the work of the men above forty, and while we should miss great treasurers, even priceless treasures, we would practically be where we are today. . . The effective, moving, vitalizing work of the world is done between the ages of twenty-five and forty.”
While his speech may have been partially tongue-in-cheek (he was 60 at the time) there was a growing perception that older people could no longer add value to society. Fortunately we (mostly) no longer think this and there are a growing number of older professionals still (happily) working – like the 87 year old doctor I met who was still studying (much to his son’s distress because he thought his dad should have retired already).
Life’s about balance they say and traditionally this has been about being a loyal and hard-working employee in order to earn money that you might be able to enjoy later. We’ve been encouraged to save our money and defer our dreams until one day when we have the time and money to do them. The “New Retirementality”* is shunning this idea and is opting to play now and then work longer. You might never get to retirement and if you do, you might not have your health or partner to enjoy it so let’s rather enjoy our money now (within reason) and work longer. The benefits are many-fold, here are just two:
1. We get to do the things we want to while we still can and with the people we love, and
2. It takes away the pressure to have a massive retirement pot to fund the unproductive years – with the power of compounding an extra 5 or 10 years of saving makes a substantial difference to the size of the pot eventually available.
People are also starting to realise that retirement is not just a financial event – rather it is a life event and if not dealt with on this basis it could have significant and far-reaching consequences. It is not uncommon to hear of people dying soon after retirement or even to find that many relationships come to an end as well. A person’s sense of self-worth quickly declines when there is no longer a purpose/reason to live. A decline in health and relationship stress often go hand in hand with this loss of purpose too.
So let’s accept that most of us wont be able to stop working at 65 and make peace with the fact that we will work longer…just make sure that if that’s the case that you enjoy doing what you do. If not, then find something that you love doing and that you can do for longer. Just make sure that you take time before then to stop and smell the roses along the way.
Retirementality* – this is taken from Mitch Anthony’s excellent book called the “New Retirementality”
This article was first published in Finweek – 25th Nov 2011
