History repeats itself, but not always. When it comes to retirement planning, trends show that our retirement will look nothing like our parents’. With rapidly increasing longevity, boundless advances in medicine and the advent of new investment vehicles, it is unlikely that you will be able to use your parents’ retirement plan – if indeed one existed – as a blueprint for your own.
In a job-for-life era where pension funds were designed to provide a retirement income until around age 72 (which was then the average life expectancy), the concept of retirement planning was a misnomer. Advances in medical science, and the resultant increase in human longevity, gave rise to a situation where pensioners were outliving pension fund provisions for the first time in history.
The advent of retirement funding shortfalls together with increased life expectancy meant that pre-retirees had to start investing in other forms of vehicles in order to supplement their retirement savings. This heralded the formation of numerous other investment models such as collective investments and retirement annuities. These new and more complex investment vehicles had to be supported by legislation in a bid to protect investors and regulate the environment, giving rise to what is now a heavily regulated industry.
Interestingly, it is the increase in complexities that ultimately gave birth to financial planning as a profession. While our parents might have had an insurance broker who intermittently sold them policies, it is unlikely that they would have required the services of a financial planner with tertiary qualifications in finance, tax and/or law.
An unforeseen consequence of increased human longevity introduced a psychological component to retirement planning that had not previously existed. It is now entirely possible that a person will spend 40 years working followed by another 30 years in retirement – and our experience shows that those who are considering retirement need to be financially and emotionally prepared for the years that lie ahead.
Along with medical advances, progression in technology means that we now carry more debt than our parents. Smart phone and device contracts, the growth in the retail industry and access to online shopping have resulted in this generation being the most indebted generation of all time. This debt has trapped us into a financial vortex of trying to pay off debt while at the same time trying to fund for an ever-expanding retirement.
As much as medical improvements have been welcomed, they also come at a price – and this has resulted in medical inflation outstripping consumer inflation year-on-year for the past few decades. Many employees are expected to fund for their own medical aid and are no longer subsidised by their employer. What used to be relatively simple projections in terms of calculating post-retirement expenditure now involves the added complexity of budgeting for future healthcare expenses over a possible 30-year period.
The thought of spending 30 years in retirement is daunting for most people, and has led to what is now oft-referred to as “retyre-ment” – the effects of which have rendered the age of 65 as nothing more than a tax event. At the age of 65, many people now ‘formally’ retire from their careers and choose to follow new careers such as providing consulting services using their unique expertise, embracing their entrepreneurial spirit or generating an income from a hobby or passion. Along with providing additional cashflow, re-treading one’s career at age 65 has proved to be beneficial emotionally, psychologically and physiologically.
In the face of this now massively complex retirement environment, the challenge of funding for one’s retirement is often compounded by the need to financially support aged parents at the same time as providing financial aid to one’s adult children. Being taxed at both ends of the generational spectrum, together with trying to fund for one’s own retirement, can cause enormous financial anxiety for a couple. Retirement planning has now morphed into what is commonly referred to as “multi-generational financial planning”, where the financial planner provides advice across all three generations to ensure that the needs of each generation are prioritised and met, and that succession plans are put in place.
There is no doubt that waves of changed have moved across the retirement planning industry. History may often repeat itself, but in the case of retirement planning, this chapter is ours to write.
Have a wonderful weekend!