30 May 2019
By Brett Jackson
May 2019 (on behalf of Cuffelinks)
The idea that when someone reaches the age of 60, it might be time to step out of work and retire into a life of leisure is relatively recent. But with more people living longer, expectations of retirement are being reshaped.
More years were added to human life expectancy in the 20th century than were added across all prior millennia of human evolution combined, nearly doubling the length of time we are living. Recently, life expectancy has been increasing by around one year every five years, and the number of older people in employment is also growing.
With the milieu following the GFC, such as low-interest rates and lower return expectations, many will struggle to save enough by their mid-60s to support themselves for an extended period.
Globalisation and technologies have imposed a dampening impact on real interest rates, and healthcare, medical appliances, personal care services, robotics and other technologies supporting independent living, financial services, leisure and property are all fields morphing to reflect grey spending power.
Multi-staging a retirement
There are two ways to consider the impact of these trends. Firstly, some people will be forced to work longer as budding retirees struggle to save enough to maintain a satisfactory standard of living. But, on the flip side, others may embrace additional years of work for health and wellbeing reasons. Many retirees struggle to replace the sense of purpose they had during their working lives. For some, a blend of these two factors may apply.
Retiring in one’s 60s or earlier might become the exception rather than the norm. Quite simply – it could end retirement as we know it. On the upside, work might become more varied, with opportunities to develop skills in new areas. Redeploying into lower-paid work with social purpose, becoming an entrepreneur in later life or bridging two quite different occupations won’t be impossible. And less rigid gender roles, with more sharing between income-earning partners, seem likely too.
With more years to fill, education could become as vital for older people as it is for the young. It is unlikely the choices made early in a career will deliver skills for a working lifetime. There should be more time for leisure, too. Signs are already emerging of a striking upturn in older people heading to the gym, with facilities springing up to meet the needs of older exercisers.
Financial planning for a multi-stage life
Most people will need to take greater financial responsibility and spend more time planning. At present, it can be time consuming to find answers to even the most basic questions, like ‘how much do I have in my savings pots?’. Retirees may need to deal with different companies on various platforms, as well as the administrators of the state pension. It may be important, for example, for people to find lost superannuation. At 30 June 2018, the Australian Taxation Office (ATO) estimated there is $18 billion in unclaimed super. This is a problem the ATO has sought to address by encouraging people to view all their super account details and consolidate accounts by linking their myGov account to ATO online services.
In the future, the process might become easier, not only to identify pension savings, but also to monitor and control what is held in investment portfolios. Ideally, we could move to a single online portal to keep a close eye on metrics like life expectancy and net wealth. This would give users the capability to move all the sliders on the asset management side as needs change.
A holistic view of what is held in investment portfolios would encourage greater understanding of the current position and an appreciation of what could be done to improve it. In the accumulation phase, the opportunity costs of undertaking a second degree or a career switch would be clearer. In decumulation, it may include the implications of choices, for example, the cost of shifting to part-time, drawing income that exceeds natural equity dividend yields, or how mortgage release will deplete assets overall.
Meanwhile, with pensions freedoms allowing investors to take quite radical steps accessing lifetime savings from the age of 55, a greater focus on addressing longevity risk and delivering lifetime income to retirees is required.
Delivering income over long time horizons
Sophisticated multi-asset portfolios that protect on the downside and participate in the upside, combining asset management and capital markets skill sets, are being suggested as one way to deliver income in perpetuity. Unlike fixed income, these products rebase as equity markets rise. Nevertheless, the products are often not indexed, there may be caps on annual withdrawals (so they won’t be flexible enough to deal with large costs like a family wedding) and are likely to be relatively costly as the assets are combined with an insurance wrapper.
Analysis by Aviva’s investment strategists has found that over the 30-plus years spent in retirement, a drawdown product with around 15 to 20% allocation to illiquids (like private debt, infrastructure and real estate) could potentially add years of income, compared with a similar multi-asset portfolio 100% invested in traditional public market strategies.
Other innovations being considered include retirement-targeted bonds. These instruments – suggested by professors of finance Lionel Martellini, Robert Merton and Arun Muralidhar of the EDHEC Business School in Lille, France – would differ from conventional bonds in that they would not pay coupons and a lump sum at maturity. Instead, they offer a secure income for an agreed term. Investors could acquire bonds to cover their income needs in retirement, probably in the later stages of accumulation, before switching to an annuity for later life.
Investment circles, where individuals pool assets and then receive a lifetime income greater than that from an annuity (but without the certainty of an insurance-backed guarantee), are also being explored. Modern tontines (an annuity shared by subscribers to a loan or common fund) are designed for those who want to convert a pension pot into lifetime income; some have the advantage of paying longevity dividends to living members, drawn from the assets of those that pass away before them. Although it’s early days, they may have the flexibility to include property, and the option to retain assets to pay a legacy.
Living with longevity is a gift, not a curse
The reality of being elderly with more time on the planet is not resulting in more time being ‘old’. In fact, it seems to be leading to ‘down-ageing’, where people behave younger than their biological age. Professors Lynda Gratton and Andrew Scott of the London Business School, in their best-selling book The 100-Year Life, say a 65-year-old today is very different from a 65-year-old in the past. They are fitter, healthier, more productive and work for longer.
Studies on identical twins have also shown factors like exercise can have marked effect on age-related decline. As a result, there can be extraordinary variety in the capabilities of people of the same age, even with an identical genetic make-up.
These considerations are important for companies struggling to fill posts. Think of Japan where unemployment is at a record low, and where job advertisements welcoming applications from the over-60s have increased eightfold over the past two years (based on adverts on the job listing website Baitoru, run by recruitment agency Dip). Looking to older workers may also be pertinent for companies simply seeking to engage better and more directly with their greying customer base.
Longer lives are changing the nature of work and retirement irrevocably. Although having more time on the planet is a wonderful opportunity, it also brings practical challenges, including the need for income to sustain oneself for years and years.
Varied paths that combine paid employment, work with social purpose, learning new skills, plenty of interaction with others and health-giving exercise are all worth investigating. To make the most of retirement in the future, it might be best to shelve assumptions about what retirement means.