24 Oct 2018
If you are like most people, you have not saved enough for retirement. There is a good chance your savings and state pension (such as Social Security) will not provide enough income to live in the manner in which you've become accustomed to for up to thirty years. However, don't feel too bad, many of us have been sold an unrealistic vision of retirement. The idea, for obvious reasons, has taken hold that after forty years of work we are entitled to spend a few decades of our life in leisure – and why not; who wouldn't want to spend their golden years in a warm climate, playing golf, surrounded by peers who also have ample free time? It is like being on spring break until you die.
However, this is not a realistic financial goal for most people. No matter how keen a saver you may be, raising children and maintaining even a modest lifestyle often does not leave enough money to spend one third of your life on holiday. There is also the fact that many people do not even pay attention to their pension, let alone save enough. According to AVIVA, nearly two-thirds of people over the age of 45 haven’t reviewed the performance of their pension meaning in the UK alone around 10 million retirements saving schemes are at risk of underperforming. If people simply aren’t saving enough, they can forget the endless vacation – they will probably face a large cut in their standard of living after they retire.
From a historical perspective the entire retirement concept is relatively new. For most of civilisation the average person worked until they became too sick or feeble, or died. According to Dora Costa's book ‘The Evolution of Retirement’, in 1880's America, more than three-quarters of men over 64 and half of 85-year olds still worked. When people did retire they had little wealth and often were dependent on relatives. The growth of retirement was driven by changes in the labour force (a move away from family farms and toward production and services), new social norms (which made retirement the expectation and created a critical mass of retirees), and financial incentives (income from state pensions and private pensions from employers). The introduction of state pensions was significant because it provided retirement income for everyone, including those too poor to save. This allowed elderly people to cease work and not be dependent on their families. To this day, many people rely on state benefits as their primary source of retirement income.
In late 19th-century Germany, Otto von Bismarck first introduced the concept of receipt of a state income after a pre-specified age. But keep in mind—he set the retirement age to 70, well beyond the average life expectancy then. Twenty-seven years later that age was lowered to 65. It's extraordinary that the 65-retirement age seems to have stuck, or even been lowered, while life-expectancy has steadily increased. This means each generation gets successively longer retirement. Retirement, like other post-industrial inventions like electricity or television, has become a luxury we've come to expect and rely upon. Like consumption of other goods, as technology advances and we become wealthier, we expect more and better retirement. This is not entirely unreasonable. Western countries have more wealth than before and better technology to save, invest, and redistribute income. There is no need to go back to the work-until-you-die model. But this does not mean current retirement expectations are reasonable either, especially when so many depend on the government to provide their retirement income.
Demographic pressures on state pensions further complicate retirement planning. Individuals are more responsible than ever for saving and investing for their own retirement. Most people have individual accounts instead of defined-benefit pensions. Saving enough and investing to provide for a long retirement is a complex financial decision with many uncertain variables, like life expectancy and asset returns. State pensions are supposed to provide an income floor, keep you out of poverty, and provide some certainty. However, there exists a great deal of uncertainty about how state pensions will continue to be financed. At least, if you invest your personal pension it can be adjusted according to your portfolio and risk tolerance.
deVere Group specialises in financial planning services including investment strategies, long term financial saving schemes, as well as tax-efficient pension plans. We formulate each financial plan according to our customers’ experience, portfolio and personal aims and goals. If you are interested in finding out more, get in touch with one of deVere’s Executive Wealth Managers who will happily assist you in securing and maintaining your financial independence.