It is no great secret that retiring by the age of 65 is getting harder and harder. We blame everything from the cost of living, and stock market volatility to the lure of our consumer society.
The fact is that all of these factors have been around to different degrees for generations. They are all certainly contributing factors, but there are two factors at the real root of today's problems — the increased amount of time people spend getting educated and their higher life expectancies.
The Pursuit of Knowledge
Originally, having a post-secondary degree was only pursued by a minority of people and virtually guaranteed you a job. This has now become a general prerequisite in our society. A high school diploma was once the status quo for attaining the predominate jobs. Recently however, the workforce has shifted. Owners now want their factories run by someone with an MBA instead of a high school diploma. Everyone wants to have a degree and believes that it will guarantee a lucrative career. This is to no fault of the person thinking it since that has been the predominant indicator in the past.
But consider, the longer you spend getting educated, the less time that you will have in the workforce, which in turn gives you less time to put away for retirement.
Remember that a high school diploma was attained on average at the age of 18 compared to a post-secondary diploma which is attained at the average age of 22 (not to mention any graduate school). In addition, post-secondary education is not subsidized like secondary education. The average student now has approximately $28,000 of debt out of school and averages 10 years to pay it off. The average graduate may not start ‘making' money with this diploma until they are about 32 years old.
This is not to say that going for a post-secondary diploma is a bad idea. Statistics do show that post-secondary education still translates into higher pay compared to not having one. The counter argument is that ‘I go to school and take on this debt in order to make more money in the long run.' Yes, that can absolutely be true. However, different degrees will have different payoffs and positions available. Some people may pursue a degree without consideration of supply and demand of the careers that come after it.
The time and money spent on a degree is an investment and some investments are arguably better than others. Having a seemingly random bachelor's degree as a “fall back” is not exactly a safety net anymore if it will just become a boulder of debt to weigh down your finances.
Higher Life Expectancy
With modern advances in science and health care, people today are averaging a much longer life expectancy than our ancestors did. The recent best estimates for life expectancy in the Western world have placed it at approximately 80 years of age, compared to an average of less than 70 years before the 1950s.
One of the first things a good financial plan will require you to do is estimate how long you plan to be retired. In order words, when you plan to die. This is a morbid but necessary in the planning stages. To paraphrase one of my finance professors who put it very bluntly: “If you plan to retire at 65 and want the money you've saved to last you to 80, you had better be dead on your 80th birthday or get in your car and go to work that morning.” It is hard to think of anything worse than being in the later stage of your life with no way to put food on the table. Keep in mind that this is also the time in your life that you incur the majority of your health care costs.
A Century of Change
Consider the average life cycle of a working person in the Western world. This graph shows at what point they have the potential to save for their retirement. Keep in mind that the shift between these two graphs did not happen overnight nor has it come to an end.
The first graph shows us that there would be virtually no resulting debt as someone enters the workforce for full-time employment. This would give someone the potential to save for 47 years by the time they reached the age of 65.
The reason I say ‘potential' is because realistically a person is spending money on a mortgage, cost of living, kids, etc. and the amount they can save will fluctuate during that period. This is true for the green zone in both graphs.
These 47 years of full time employment left a person with a lot of room for error. It made it easier to smooth out any decline in their finances such as a stock market crash, loss of employment, or a major purchase like a house that would take 25 to 30 years to pay off. In addition, a life expectancy of approximately 70 years would mean that you are effectively retired for five years. This meant that you had 47 years to save money that would need to last you for about five years.
It was essentially what the original model retirement was built on. It seemed to serve the intended purpose at the time, but it has not been significantly modified in correlation with both educational and life expectancy trends for almost a century. You cannot have one static solution to dynamic variables and expect it to stand the test of time.
In the second graph, the additional time to educate yourself pushes your full-time work to age 22 and the resulting debt takes approximately 10 years to pay off. A person is not on par with previous generations to start saving until the age of 32. By the age of 65, you've now had 33 years to potentially save for retirement. That is a 30% decrease! Now focus on how long the money you save has to last you. With life expectancy at 80 years, retiring at 65 requires you to have the money last 15 years instead of 5.
Having less time to save and requiring the money to last you a longer period of time spells trouble.
The Next 25 Years
The gap between the amount of time a person is in the workforce and retired will only narrow. We have had the idea of retiring at 65 for the better part of a century and the hardest part will now be to change that expectation.
The system is not broken, it was built this way. It was built for a different generation with a different expectation. We may need to change ours.
is a chartered professional accounting and chartered accounting student at Draganjac Pressman.