RIP Retirement! We only knew you for a century!
While retirement has evolved through the decades since its beginning about a century ago, there are some notable themes in those changes. When you take those themes and overlay present day society, it seems likely that traditional retirement is now anachronistic.
What is clear to all: no longer does one work for 30-40 years, then take a pension for the last 10 years of frailty and ultimate death due to cardiovascular disease. As lifespans increase (and continue to do so in the future) and frailty retreats, the concept of retirement needs retired.
I want to look at the historical epidemiology of retirement over the last century, then mention some financial aspects, and finally finish with a prediction as to the future of retirement.
First, let’s look at the history of retirement and see the trends.
The Historical Epidemiology of Retirement—Labor Participation Rate
Let’s start off with the above: active labor force participation rates by age and over the decades.
Note that in 1880, most folks worked and the decline in labor participation started at about 60 years of age. And, in fact, most people didn’t live that long back then, so truly most people worked until they dropped dead.
Next, note that when comparing each decade, the decline in labor participation starts earlier and earlier. Next, the decline affects a larger proportion of the labor force: a higher percentage is retired at any age. So much so, that by the time we reach 1990, folks began stepping away from employment in their 50’s despite much longer lifespans.
In summary, looking at historical epidemiology points us to the fact that people are stepping out of the work force earlier and earlier despite longer and longer lifespans.
It is important to look at the increase in lifespans over time, so let’s look at that next.
Lifespan and Retirement—Average Age of Retirement over Time
Above, you can see life expectancy, the average age of retirement, and the percent of the population in retirement. Note that as life expectancy increases, the percentage of retirement aged people increases as the average age of retirement decreases. Another way to say this: even though people are living longer, they are retiring earlier and thus the percentage of population who are retirement age increase.
These are 30-year blocks of time above. Note there is (for the most part) a linear progression in the data. What if we model forward another 30 years?
Linear modeling show that in 2030, the life expectancy at birth should be 80, the average age of retirement 58, and retirement population 20%.
Of course, demographics and advances in medicine make those figures squishy, but the story is: you will “retire” sooner and live longer than your parents did.
With that conclusion firmly in our minds, let’s address the financial aspects that cause retirement RIP. Not only will you have a longer retirement, you cannot count on the financial tools your parents used!
Retirement RIP—Financial Aspects
Retirement as a unique phase of life only dates back about a century. Historically, it began with pensions from the military, and expanded to other forms of forced retirement during the industrial revolution. No one (then or now) retires from working on the land, but the need for industrial workers to keep pace forced frail elderly off the lines.
Germany and Otto von Bismark get credit with coming up with the retirement age of “65,” but even the Social Security disputes that. They credit rail road and pension systems (for the frail elderly on industrial production lines) for the magic retirement date of 65.
Pensions provide well for those who might live 10 years after retirement. And until the increased popularity of the deferred compensation plans (ie, 401k plans) overtook the pension system, retirement is easily supported by a three-legged stool—social security, pension, and home value.
Historically, the three-legged stool works.
Now, RIP retirement because not only are pensions all but gone, but the three-legged stool falls to inflation concerns when length of retirement is expanded.
Let’s focus on inflation. [As an aside, this is long-term inflation, not the temporary spike in inflation we currently fear due to supply chain imbalances.]
Inflation: Retirement is an Anachronism
Historical ways to fund retirement no longer work. Let’s review the traditional three funding sources of retirement and see how inflation over 40-50 years should decimate them.
Let’s start with social security. Of course there is a cost of living adjustment with social security, but it is set at inflation levels seem by younger folks, not folks in their later years of retirement. Intentionally (because it is cheaper to fund the liability), social security does not keep up with true inflation of one in retirement. As the length of retirement increases, this gap widens.
Next, there are almost no inflation-adjusted annuities any more. They are just too expensive! So, too, pensions do their best to get rid of the massive (and unknown) liability associated with inflation. Fewer pensions offer inflation protection as they, just like the insurance companies and their annuities, cannot afford the liability of inflation over decades.
Finally, the home does tend to keep up with inflation over the last 100 years or so. But just! Folks think home ownership is a great return on investment, but the truth: it returns about 3% per year, on average.
So, with the three-legged stool of traditional retirement, you cannot keep up with inflation over longer periods of time. Retirement is an anachronism because you cannot fund it.
Even though real spending actually decreases over time (due to the retirement spending smile), the compounding effects of inflation over decades decimates a three-legged stool.
The point: you can no longer to expect to survive future retirement on a three-legged stool.
Or on “income” either, for that matter.
RIP Retirement: on “Income”
It is ironic that in the past, the wealthy were wealthy not because they had assets, but because they had income. In Ol’ London, a Rich Person did not have several hundred thousand pounds, for example, he or she had an income of a thousand pounds a month. Income is what made the upper class wealthy in the past.
Unfortunately, this idea of retirement income has stuck in the zeitgeist and persists today. The bad news is that you are unlikely to survive retirement if you focus on income.
In fact, you know someone is old fashioned when they talk about living on their income and dividends during retirement. RIP retirement on income and dividends: it just doesn’t work that way anymore!
Aside from dividends being tax-inefficient and promulgating concentrated, risky stock positions, there are just better and less risky ways to fund retirement!
That said, it takes a long time for old ideas to die off, so folks will still be talking about anachronistic “income” investing for years to come.
You are better served using a total returns approach to investing if you want to survive retirement. Moreover, you should consider not only asset allocation, but more important product allocation when considering your funding resources in retirement.
At this point, I hope you see the three-legged stool is not the answer. I doubt I have convinced many that income investing is also not the answer after this short diatribe, but the topic deserves a book-length treatment rather than a blog.
So, we know retirement begins earlier, lasts longer and will affect a larger share of the population. And traditional funding sources tend to fail over this prolonged period of inflation stress.
Before I go to the future of retirement, I want to tackle two other quick concerns.
RIP Retirement—Miscellaneous Issues
Look quickly at the glidepath for target date retirement accounts. It goes down to 30/70 or even lower. Is that sustainable over 40 years of retirement?
Risk Free Rate
Next, remember our parents talking about living off 12% returns from CD and how easy life was back then? Remember, however, that was when inflation was 10% plus so the real return was 2%
In fact, the risk-free rate of return is usually 1-2% historically, so it always has been a losing effort to try and live off income. Just hope you don’t live to long!
And in actuality, the risk-free rate is currently MINUS 1-2%. Inflation will eat your lunch if you have a normal 40-year retirement and try to keep up with anachronistic income funds.
Traditional retirement is dead. People don’t even like the word “retirement” anymore!
Some books written on the topic:
Rewirement: changing the way you think about retirement
ReVivement: having a life after retirement
Don’t Retire: Rewire!
It’s like no one even wants to use the word anymore. Indeed, in 1999, AARP dropped “Retired” from its name! As I’ve said, retirement is an anachronism.
So what’s next?
Retirement is an Anachronism: On to the Future
Let’s move to the future. What will retirement actually look like in the future?
Consider that which is currently changing the world of employment: smart phones and the gig economy.
You won’t retire in the future; you will monetize your hobby and have gigs from your smart phone. After all, we must move from a knowledge-based society to a wisdom-based one. Everyone has knowledge at the tip of their fingers all the time. Who has all the wisdom?
The new retirement: it is also gig-based. You no longer have a J.O.B. You monetize your passion in retirement.
Certainly, you can accumulate a nest egg and formulate a withdrawal plan such that you don’t need to “work.” But who doesn’t want to work for the last 50 years of their life? Work is, after all, the purpose of life (right after family which is more work than most need).
As we age healthier, it will be rare to die from “old age.” Instead of planning on a 10-year break at the end of your life, we must consider a 50 plus year period of re-engagement with different aspects from your youth. Work will continue in retirement not as something that must be done, but as gigs that support your interests (and your bottom line).
In summary, historically being rich meant you had an income. Traditional retirement is not about asset gathering, it is about how much you get each month. Traditional retirement rife with social security and pensions is destined to succumb to compounding inflation over a half century retirement.
You must continue to either accumulate assets or gig in the new world or retirement.
While I’m sure articles claiming “RIP Retirement” have been around since, well, traditional retirement, RIP retirement nonetheless. Retirement today is an Anachronism, and there are good great changes afoot (or at least in your hand).