In part one of this two part introduction, we showed how the new retirement reality for today’s retirees is very different from past retirees reality and experience.
This is down to significant economic factors which impact the accumulation/decumulation equation and make retiring much more costly and more reliant on personal contribution.
These economic factors seem to be part of cyclical trend. However, one thing we did not cover in part one, which pours fuel on the fire, is the dramatic change taking place – across the world – in demographics.
This is naturally going to have an economic impact and will contribute to the economic patterns of change referred to in part one.
But it is probably worth considering demographics in isolation, as well.
The demographic timebomb
As with the economic trends, this is not a futuristic position, those trends are fully underway and you can see the consequences coming through now.
So it is with the demographic timebomb. Its effects are already coming through. This is not some future situation that may arise or will occur down the track. It is underway.
And the direction it is heading in is really very clear.
This has profound consequences for health care costs, the cost of living in retirement (or after age 65 if you prefer), taxation rates, productivity, state pension affordability, and government finances.
Also, it will presumably have a knock on to investment returns.
The worrying thing about this is that one would speculate that to cope it would help if government finances in these countries were in good shape.
But with huge deficits and debts accrued and accruing in most of these places, the outlook is concerning.
In other words, as the demographic timebomb explodes it does so from a poor starting point.
If nothing changes, things will get very grim.
Inevitably therefore things will change.
In particular it seems likely, if not certain, that the nature of retirement and work will be very different in the future.
Retirement ages will adjust and it will be much more common to see people working well into their 70s and possibly 80s.
This is really the most logical conclusion and this will change the nature of financial planning, because whereas in the recent past the accumulation/decumulation position was hooked around ages 60/65 as a pivotal point, then that point will change.
However, there is a big caveat and that is that on an individual level the threat of not being able to work longer, through ill-health as the primary risk, will have serious ramifications.
Ill-health prospects start to go vertical after age 50
Currently, ill-health risks start escalating at variable ages depending what one is looking at.
Graphs, plotting ages against health risks, go from a small gradual rise as age increases, to very steep, almost bordering on vertical, at certain critical ages.
For example for men cardiovascular disease rises steeply from age 55, for women from age 65. The same with cancer rates, for both men and women these are late 50s.
This is typical for most older-age related diseases, even if the critical point varies from disease to disease, condition to condition.
Collected together these various graphs add up to a significant upward slope in the curve, which increases the older you get.
Looked at as a population this means the number of people able to work as a proportion will be much lower at, say 70, than it is at say age 30.
At an individual level the odds of being able to work, even if you are willing, are lower the older you get.
Of course ill-health is not necessarily a barrier to being able to work in every instance, however it is quite clear that a blanket policy of everyone retiring later to compensate for the demographic shift has limitations.
An individual can therefore declare “I will retire later than my parents did” and plan to keep working to age 70, but this option may not be totally within their control.
This means that planning has to somehow bring in some form of insurance against a combination of retiring earlier than this, but still living a long time or having a long period of ill-health with the possible difficult income/expenditure position this can create.
It’s an oversimplification but it’s valid to consider the coming years as a form of third stage in the long-term trends.
Stage one, which we can think of as any time prior to around 1980 involved a very short retirement period for the average retiree.
Stage two, which we can look at as the period that followed up to around 2020 was dominated by increasing numbers of years in retirement, but buttressed by rising house prices, rising wealth, final salary schemes and state pensions. Plus, benign economic conditions and a demographic prop.
Stage three is the stage we are now describing as problematic for retirees.
The solutions that worked in stage one and stage two will not offer the same outcomes in stage three.
How to plan for and manage retirement in the new stage
Universally, governments will need to play a big role.
This is not just in terms of state pensions and benefits, but also in creating the right type of economy, one that allows flexible working practices, staggered retirements and rewards employers for recruiting older workers.
Health and social care will need to be re-evaluated and significant support offered in terms of a safety net for those who cannot pay the bills and/or need care.
This safety net will have to increase and it is likely (e.g. with care insurance) that there will be new solutions in terms of public/private initiatives.
Individuals will have to adjust their retirement compasses.
This will involve having to do more to accurately price up their retirement, considering closely the balance in paying for this between traditional investment-led solutions, insurance and guaranteed income sources.
In the recent past it was fine to approximate these costs and risks, however it is likely that the new conditions will make it far more important to ensure both of these are properly measured and, as a consequence, understood.
- A resurgence in annuities
- A reduction in the riskier assets held (i.e. less money in a portfolio will be in real assets)
- An acceptance that much accumulated wealth will have to be spent
- A reformation of the way legacies are dealt with
- A fresh review of how to insure against the variable threats offered by inflation, prolonged ill-health and care requirements or a healthy long life
It is interesting to note that in the most recent retirement period many of these risks and considerations were capable of being tackled by one overall solution.
You would accumulate ‘enough’ and because of market conditions, you could live off this ‘enough’ generally knowing this would cover you if you saw a bit of inflation, had some period of ill-health or lived to 100.
That definitely will not be the same going forwards, so planning will have to address these risks sequentially and find a balanced solution against them all.
As they are all increased risks in one way or another compared to the recent past.
It all starts with pricing up retirement accurately and alongside side this plotting out income and expenditure scenarios, then the individual risks applying to your situation will become clear.
And from there, suitable solutions can be crafted to take care of them.