How much of your retirement have you painstakingly planned? Are you working yourself to the bone now, so you can retire early, like the FIRE movement people?
We’re not in the business of telling people how to enjoy their lives, but we do think you should enjoy your life…now AND later. Which means cultivating a life that you’re not trying desperately to escape from. And an unfortunate side effect of the concept of retirement is that people think they know what to expect. They think a million dollars is the golden ticket to life on the beach sipping muay thais and never working again.
And while this is certainly an appealing idea, it doesn’t leave much margin for error. The reality is that many retirees don’t have sufficient cash reserves for the retirement they want, and certainly not one that will last them from age 65 to age 100. Even fewer have a real conception of what it might take to cover disability, illness, or injury. And of course, this doesn’t even factor in people who want to retire by age 40.
So, we’re here to pose an alternative–one that ideally fuels you and helps you enjoy life now AND in retirement. We’re living longer, and it’s time we started acting like it, by cultivating a lifestyle that supports longevity.
To understand this, let’s look at how retirement began, as well as the modern factors of the retirement paradigm.
Retirement as We Know It
The roots of modern “retirement” date back to 1881, and Otto Von Bismarck. The conservative Prussian Prime Minister, age 74 at the time, proposed what was then considered a radical idea: government-backed support for the older members of society.
It was true at the time that people who lived also worked, regardless of age. It was only those who tended to exceed life expectancy or find themselves disabled that could not work. William the First, in his German Parliament letter, wrote: “. . . those who are disabled from work by age and invalidity have a well-grounded claim to care from the state.”
Shortly thereafter, any Prussian citizen over age 70 would receive financial assistance in the form of a pension . (In 1916, it changed to age 65.) The catch? It was specifically meant to cover the population who lived past life expectancy. It wasn’t designed to support those who lived beyond expectations for another 20, 30, or 50 years. It was designed to care for the “outliers.”
Even so, by 1935, the American government officially implemented its own form of government-supported retirement. When the Social Security Act passed, the official retirement age became 65. Incidentally, the life expectancy for men in 1935 was 58. That means men would have had to live at least 7 years beyond their life expectancy at the time to even collect a social security check. However, 65 became the “default” retirement age in America.
The Truth is, We’re Living Longer
Today, we can’t imagine a world that doesn’t include retirement or retirement benefits. The problem is that our idea of retirement hasn’t shifted with the times. So even though life expectancy has steadily increased in the last 85 years, we’re still retiring at age 65.
The Macro Trends chart below shows how life expectancy increases over the years. The blue line is the life expectancy line It continues to rise, and for 2020, it’s 78.93:
If we expand the number of years until 2100, the life expectancy line increases further still:
Chances are, you know people who have lived well beyond that age who may live on a fixed-income for decades. It’s also worth noting that those who are 65 today seem younger and healthier than those at the same age in the 1930s. Hence, some retirees delay their retirement because they love what they do and they want to optimize their social security benefits.
Is this the true secret to longevity, both in assets and health?
How Typical Retirement Misses the Mark
While actuarial science and longevity projections have gotten more sophisticated, it’s impossible to know how long you will live. Yet, we all seem to plan for retirement as though it is set in stone. Unfortunately, plans without flexibility often miss the mark.
The issue of retirement is twofold. First, there’s a question of how much is enough money to save for retirement. Secondly, if your plan to retire at 65, you have to balance your income distributions so that you don’t run out…without knowing exactly how long you will live. Often, distributions are undercut by the fees and taxes that accompany qualified retirement accounts. Unfortunately, with longer life expectancies, we’re seeing an increase in retirees running out of money while they’re still alive and in good health.
The alternative approach is also twofold—finding and pursuing the passions you enjoy, so that life doesn’t become something to escape from. Then, building wealth that you won’t outlive. This is achievable by focusing on consistent income-for-life cash flow strategies rather than a ballpark “million-dollar dream.”
A million dollars, while a long-term desire for some, isn’t worth the same in retirment when you factor in the cost of living and inflation down the line. Cost of living may add 50% for every 10 years and 100% for every 20 years. A single illness can cost a person $40,000 to $100,000 a year (if assistance becomes necessary).
Furthermore, based on Bureau of Labor Statistics data, households for those 65 or older can run typically $3,800 a month or $45,756 annually. That means in a typical retirement, you need to spend less, earn more, live healthier, or a combination of all the above.
That’s why we see things a little differently.
Retirement: What Needs to Change?
Besides educating yourself about wealth building, start rethinking retirement. And fortunately, we did the math for you.
The first step is to find the difference between life expectancy today and life expectancy in 1935. So if you divide 78 (2020 life expectancy) by 58 (1935 expectancy), you’ll get 1.34482. That means that life expectancy has increased by nearly 1.5%. The next step is to multiply that rate (1.34482) by age 65, to show the increase. The result? 87.41379.
The concept of retirement has not changed since the 30s. And yet, people are living longer, and typical retirement strategies just aren’t working the way many Americans hope. Based on this math, we should actually retire closer to 87 than 65.
What could this solve? For starters, staying in the workforce longer can help you have more purpose, achieve more long-term desires, and accumulate more wealth. You can also benefit from maximizing your social security benefits by delaying the benefit until your full retirement age (FRA). As an example, if you retire at age 62 and your FRA is 67, your monthly benefit is about 30% less than if you waited.
The typical retirement mindset of age 65 does not serve us anymore. It puts us at an extreme disadvantage. It’s not enough to have “age 65 tunnel vision.” We must assume our golden years might extend much longer than 10 or 20 years.
Changing the Retirement Narrative
Rather than an expectation of life, retirement should be a deeply personal decision, and saved for a time when you are truly well and don with your purpose. There’s no reason you have to stop doing what you love because you’re 65, and there’s no reason that work has to look like a 9-5 office job either. Redefining work and purpose can make your personal retirement paradigm much more sustainable in the long run.
One of the best things you can do is look for ways to live longer and healthier and develop a sound retirement income strategy so you don’t outlive your money. If you’re looking for ways to optimize your income, and do what you love for longer, talk to us about aligning your retirement income with your long-term dreams.
If we can help you follow the alternative path to “retirement” by building wealth now and creating a life you love now, contact us to be put in touch with a Prosperity Economics Advisor.