Throughout most of human history, the only time you retired was when you died.
Retirement as we now experience it is a reasonably recent phenomenon. It’s an invention of the 20th century and it’s worthwhile questioning whether it will continue through the 21st century, at least in the format we currently think of.
When the retirement age of 65 was set, back in the early 1900’s, it was assumed you only had 2 or 3 more years left until you were in the grave.
But as we live longer and longer, will the current version of retirement continue to be feasible for the bulk of the population? Perhaps more importantly, will it be desirable?
Why do we retire? Originally the idea was that a pension was provided to those who had become too old to work. It was in a time when almost all work involved physical labour. Working life often started in your early to mid-teens. If you were fortunate enough to make it to 65, you were likely to be quite thoroughly worn out.
In some cases retirement was also seen as a way to make room for the younger folk. Whilst rare, there remains some examples of this today, with professional services partnership such as accounting and legal firms often having compulsory retirement ages for their partners.
In the past few decades, retirement has also often come about not through choice, but due to redundancy, as the nature of our employment turns increasingly to desk based work. Skills that had been valued became obsolete, a phenomenon not likely to dissipate in the years ahead.
And of course, there remains the ideal reason for retirement – because we want to.
Of those 4 reasons for retirement – unable to physically continue working, making room for the next generation, skill obsolescence, and through choice, none are clearly linked to a particular age in life.
Through misfortune you could become physically unable to continue working at age 40, or be quite capable of working into your 90’s.
Making room for the next generation would seem to be a pretty flimsy reason to impose retirement on someone, but even assuming it has some validity, any sort of mismatch between employment opportunities and prospective workers cannot logically be tied to a particular age as each industry would have a different need.
Skill obsolescence is similarly industry specific and can happen at any time – just ask those who until recently worked in the car manufacturing sector in Australia.
And finally retirement through choice, the version we all seek, need not occur at some particular age as plucked out by elected representatives over 100 years ago.
Part of the problem with our current retirement thinking is that it’s founded on the overly simplistic belief that everyone will be “old” at the same age. The definition of “old” being beyond the point of completing useful work.
There are some people who, at age 65, are physically worn out, and do need to leave their work arrangement. But there are plenty of others who are fit, healthy, and perfectly capable for far longer.
I’ve dealt with several specialists in the medical field who work on well into their 70’s.
Famous investor Warren Buffet is in his 80’s and still turns up to work every day. Why? He enjoys what he does. It’s certainly not because he needs the money, he has an estimated net worth of about US$90billion.
So tying retirement to a certain prescribed age – let’s say 65, simply no longer makes sense. Factors including genetics, nature of work performed, access to training and skills development, and health care in the country where you reside, all have an impact on your ability to continue in an income generating role.
But beyond the concept of retirement necessitated by reaching a certain age, financial realities will likely also mean our current model is unsustainable.
Let’s start by looking at the Age Pension. For how much longer will tax paying workers continue to be happy funding the caravanning trips their parents or grandparents? It’s reasonable to ponder why, if they’re physically able to travel, or play golf 3 times a week, they’re not able to support themselves through some sort of income producing activity.
We’ve already seen considerable change in this regard, with the Age Pension becoming harder to qualify for. This dovetails into the growth in our superannuation system and other retirement schemes around the world.
But here there’s a challenge too. Interest rates over the past decade have been persistently low. At present there’s nothing on the horizon to suggest they’ll be rising meaningfully in the medium to long term. Rental yields on residential property have trended down in recent times to often around 2% in capital cities, though this has improved a little in the last 12 months as property prices have come off a bit.
Only shares continue to provide returns in line with most people’s expectations of high single digit to low double digit results. But can this continue?
If you need $50,000 per year in order to retire, and you can earn 5% on your savings, then with $1million dollars, you’re in business. But if you can only get 2% on your money, all of a sudden you need $2.5m to deliver the same outcome. That’s a heck of a lot more saving.
Logically then, investors will be drawn to investments offering higher returns, either aware or ignorant of the additional risk that they embrace. As more retirement savings flood into the share market, prices rise and yields decline – lowering returns, very similar to what we’ve seen in property over the past 20 years.
The quite rigid life plan that we are feed today – roughly 20 years of childhood and education, followed by about 40 years of paid work, topped with 20-30 years of retirement, is already changing – but change needs to happen sooner.
Why are parents of young children put under so much pressure to return to the paid workforce? Perhaps it would be a better outcome for their children, themselves, and society as a whole, if they worked less during those early childhood years, and instead extended their income producing lives after the kids have grown up.
Why is Monday to Friday, 9-5 the right answer? As we get older, we may well want to slow down – work part time, or just at certain times of year. Rather than pushing hard to retire as early as possible, perhaps a better journey might be found through cutting back to 3 days a week and continuing to generate income much later into life.
I was speaking to a primary school teacher recently who observed that in their career, you reach the top level fairly early in your working life, and from there, unless you want to get out of the classroom, you just plateau. After 10 years, he was about done. (This is something of a reverse of the journey of Tim Lavery who I spoke to in episode 55.)
This points to another reason our current retirement structures needs to change. As technology evolves ever faster, how realistic is it to assume that a career that we train for in our early 20’s will sustain us for the next 40+ years? We may well need 2 or 3 careers in our lives. Yet at present, taking some time out to go back to school is financially challenging and is usually only possible after a generous redundancy package. Why can’t for instance, we access our superannuation for a year or 2 to enable us to retrain in perhaps our 40’s? That new career might enable us to stay in the workforce into our 70’s or perhaps longer. But the current system doesn’t allow for that.
Generating income throughout your entire adult life will grow more and more important. And the ways you go about generating that income will expand – from traditional paid employment, to investment income, freelancing work, and self-employment opportunities.
Our current approach to retirement is far too rigid. I predict significant change over the next decade.
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