By Andrew Scott
If you are in your 50s or 60s your thoughts are probably turning towards retirement. When should you retire? How much money do you need?
In trying to answer these questions you face a problem. Because of longevity trends we are on average living longer. Over the last 200 years, life expectancy has increased by two or three years every decade. That implies for those in their 60s they have a 50% chance of living until their late 80s and those in their 50s into their early 90s. Even more dramatic is the number of people living beyond 100. Today, around 72,000 people over 100 years of age live in the U.S. If current trends continue, there will be approximately 1 million by 2050. Your retirement planning needs to factor in the possibility of a substantially longer life than past generations.
Most people haven’t saved enough for retirement and greater longevity only makes this problem worse. One reason so many people under save is a behavioral bias towards short-term gain over short-term pain/long-term gain. The same dangers face you when you choose between a reduced but early Social Security Pension at 62 or enhancing your pension by not claiming until 70. Longevity trends should for most people make the latter more appealing, but the short-term benefit can appear seductive.
There is a natural tendency to assume you need less money than when you work when planning for retirement – you have more time and so can shop around for better deals. There is also considerable enjoyment to be got from simple activities such as sitting in the park or spending time with family. But it is easy to overestimate the savings these yield. Aiming for roughly 75-85% of your preretirement expenditure seems a common aim for most, although the less your current income the more this number tends to 100%.
Remember too that there are things you can do before retirement. Take a look at your spending habits. If you can’t afford them going into retirement they will need to end. Better you start to adapt now so the change is less dramatic.
Increasingly a key variable for making retirement work financially is deciding to work for longer. In 1850 more than 75% of American men worked past 65 but by 1994 this had declined to 17%. However, this percentage is once more starting to increase with the Bureau of Labour Statistics forecasting it to reach 26% by 2024. In 1994 9% of American men aged over 75 were in the work force, in 2024 it is predicted that 14% will be.
If working for longer is a required part of your retirement strategy, you need to consider whether it is actually an option. Can you be sure that technology won’t destroy your job? Do you have the skills to continue to succeed or will your position become increasingly irrelevant? Retraining and reskilling may be required to support a longer career.
For most people in their 50s and 60s their friendship groups and networks are made up of similar people in terms of age, gender and professional expertise. If you need to invest in change for the final stage of your career where will you find inspiration? It’s crucially important to be open minded and extend your network. Juvenesence, or ageing young, is an important feature of a longer life.
If you are to work for longer it is also important to think about how you maintain your fitness and happiness. Without investment in these areas the danger is you will work for longer, but not live for longer. You need to take stock of non-financial as well as financial assets in your retirement planning. (For a self-audit tool see here.)
As we live for longer there is a growing risk we become incapacitated earlier, creating a delicate trade off. To deal with that risk you need to save more for precautionary reasons which probably means working for longer. However, if you work for longer, but become ill, then your enjoyable retirement time is reduced. The answer to this trade off will be different for different people depending on their health, financial circumstances, risk tolerance and enjoyment of work.
Greater longevity is a great gift to society, but to fully exploit it we need to structure things differently. Securing your financial assets is important, but dealing with the likely reality of working for longer is crucial. You need to think just as hard about your non-financial assets – your skill set, your health and your friends and family. The good news about longevity is you have more time to prepare for retirement than you may have thought.
Andrew Scott is a Professor of Economics at London Business School and the coauthor of The 100-Year Life – Living and Working in an Age of Longevity.
