If you are 45 or younger, forget retirement.
Immortality may be within reach in the next 40 years – or at the very least we will all be living a lot longer than we are now. Viresh Maharaj from Sanlam Employment Benefits says that scientists are working on ways to reverse the aging cycle, and developments in nano technology and stem cell research mean it is not inconceivable that one day, people could live forever. Even now, our life expectancies are already increasing dramatically.
This sounds like good news all around, but it poses some serious financial challenges. The greatest financial risk that retirees face is longevity – basically outliving their retirement money.
The question Maharaj raises is whether retirement itself is an outdated concept. The first retirement fund was created in 1881 with the retirement age set at 65. At the time the average life expectancy was 45, so most people worked until they died, but if they lived well beyond their expected lifespan, there would be some financial support for them.
It has only been since the 1960s, with advances in medicine and increases in life expectancy, that people have started to retire in large numbers and the idea of retirement as a lifestyle came into being. The average person is now living 20 years longer than in 1950, and as our life expectancy continues to grow, with many young people today expected to live into their 90s, we may need to question whether it makes sense to retire in our 60s. Firstly it would be virtually impossible to save enough money during our 40 years of working to fund 40 years of retirement. Secondly, many people are still active citizens until well into their 70s and we may be losing valuable skills when they retire unnecessarily.
Retirees are also facing an issue that has been coined “the sandwich generation” where they are financially supporting both elderly parents and their own children. With people starting families later in life, coupled with rising youth unemployment, many parents face the reality that they will be supporting their children for longer than expected, while increased life expectancy means their parents are living longer and usually outliving their retirement provision.
Given the new realities, Maharaj argues that we need a re-think about the way we approach retirement:
Postpone retirement: We should expect to work for longer, even if it is part-time. This creates an opportunity for companies to provide mentorship programmes by utilising the experience of its older staff members rather than losing them to retirement. It also allows people more time to prepare for retirement. Most people only start worrying about retirement funding about 11 years before retirement, at which stage it may to too late. If however you delay retirement for six years you double the value of your retirement fund – that is a quick way to improve your retirement finances.
Defer withdrawal of retirement funds: Companies should remove the requirement for members to withdraw funds at retirement. If a fund member continues to work part-time and does not need to withdraw from their retirement fund they should be able to preserve the money and not be forced to purchase an annuity.
Longevity cover: The social old-age pension should increase for people over the age of 80. Statistics show that people in this age group face extreme poverty as they are no longer able to supplement their incomes with additional work. A similar concept should be built into our retirement products where people are able to take out a longevity insurance that pays an income after a certain age. This would also enable a retiree to better plan their finances and ensure that they do not outlive their money.
The bottom line is that if you are 45 years old or younger, don’t plan on retiring at 60. It’s unlikely that you will be able to afford to – or even want to. What you need is to have a career plan that finds ways for you to use your skills for as long as you are mentally able to.
This article first appeared in City Press