With people living longer, we perhaps need to question the wisdom of retaining the retirement age at 65. But, while governments and companies stick to a retirement age that had relevance several decades ago, there are strategies we can adopt to invest for a longer, more productive life.
I’ve often wondered why the normal retirement age is 65. Who decided that this is the right age to stop working and on what basis? With only 5% of the SA population able to retire and maintain their standard of living, a 95% failure rate can’t be right. As an industry and society, how do we assist with the softer more emotional side of dealing with this significant life event that we call ‘retirement’? Is it even relevant in the modern world, and how might it change in the future?
My mother was forced into retirement when she turned 65 last year, and through her I experienced the realities of this life event for the first time. The psychological stress of going through this process has been quite a thing. My mother wasn’t ready to leave work, her colleagues didn’t want her to go, and yet the employment contract and pension fund rules dictated that her employment had expired.
As a result, I’ve been questioning the legitimacy of this concept and whether age 65 is relevant in today’s world as a ‘normal’ retirement age. From a financial perspective, the generally accepted industry norm is that you should spend two thirds of your life in the accumulation phase saving for retirement, and one third in drawdown. Through medical advancements, life expectancy is being pushed out all the time, so this is a dynamic reality and one that requires regular revision. For example, one third of babies born in 2013 in the UK are expected to live to 100. These developments require a change in the way we manage our finances.
The pension as a concept was born in the 1880s when German Chancellor, Otto Von Bismarck, was facing a social revolt and needed a mechanism to pacify the nation. His solution was to introduce a social pension scheme, which promised support from the government for older citizens. 70 was chosen as the retirement age, but this was later lowered to 65. Employers, employees and the government would all contribute.
The challenge with the system at the time, from a societal perspective, was that life expectancy was a lot lower than it is today, so few people enjoyed the benefits of this scheme in its earlier years. The US adopted a similar model over 50 years later, and the magical number of 65 was also chosen – and in many instances, this is still in place today.
The world today is different in so many ways from what it was 130 years ago. If the futurists are correct and the first person to live to 150 has been born, why is the normal retirement age still 65? Should the retirement age be the same across all industries? An individual who has been involved in hard physical labour their whole life is surely not expected to live to the same age as someone like myself who has been fortunate to work in a comfortable office environment. If we go back to the one third, two thirds principle for savings and dissavings, if I go on to live to 125 and I started working in my mid-20s, surely I should consider retiring at age 90? The plan of early retirement at 55 appears now to be the stuff of dreams!
You could of course build a counter argument to my theory of extending the retirement age beyond 65, looking at the South African perspective. With youth unemployment at unacceptably high levels here, some may feel that more people should be vacating their roles to make room for the next generation and to some degree this is valid. From an employer’s point of view, experience and corporate memory must influence your thinking of the ideal mix of youth and experience in your business. Older employees can play a role in mentoring younger employees, for example.
Policymakers typically consider factors like demography, fiscal cost of ageing, health, life expectancy, nature of profession and the supply of labour force etc, when deciding the retirement age.
According to the Mental Health Foundation, one in five of present-day retirees experience depression. This often happens because people lose the sense of purpose that working provides, or because they lose the social interaction of the workplace. Those living alone because of bereavement or divorce are even more at risk while physical health problems can also make people more vulnerable to mental health issues. Recent studies have indicated that retirement increases the chances of suffering from clinical depression by around 40%, and of having at least one diagnosed physical illness by 60%.
Strategies for working and investing
Many workers have adopted a strategy of scaling back on their jobs at around 55 or 60, or even changing careers, but still working for 15 to 20 more years. By investing in flexible investment products, you can defer retirement and maximise your probability of a comfortable, sustainable lifestyle.
There are lessons that we can learn from other geographies around the globe. In Australia, the retirement age is to be increased gradually to 67 years by the year 2023. Since 2011, employers in the UK can no longer give employees notice of retirement under the default retirement age provisions and need to objectively justify any compulsory retirement to avoid age discrimination. The US Code of Federal Regulations discusses age discrimination in the Employment Act, saying that an employer can no longer force retirement or otherwise discriminate on the basis of age against an individual because (s)he is 70 or older.
In the Roman Catholic Church, Pope Paul VI introduced a mandatory retirement age of 70 for priests and 75 for bishops and archbishops. There is no mandatory retirement age for cardinals nor for the pope, as they hold these positions for life, but cardinals age 80 or over are prohibited from participating in the papal conclave.
Many people turn to the church when key life questions require answers and perhaps we should take some direction from the church on the question of a more appropriate retirement age. Arguably, the entire concept of retirement is flawed and we should be looking at a gradual process rather than a single, abrupt event. As for my mother, as she enters ‘the afternoon of life’, she’s off to the UK to try and find employment because she can’t afford to retire from a financial, mental, emotional and well-being perspective.
The good news is that product innovation and sound money management through allocation to suitable financial products and the appropriate asset classes and managers can fill the gaps. The professionals at Investec Wealth & Investment, as the leading private client wealth management firm in South Africa, can assist you in your journey.