The Amateur Financier

Ah, retirement.  The (long-term) goal of just about everyone currently working, the time when we can call it a lifetime and relax, enjoying the fruits of our labors.  Reaching sixty-five, getting a gold watch, going to Florida and spending the rest of your days in the sun, enjoying life as you live off a fat pension, generous Social Security payments (or the equivalent in most Western countries) and the gravy of any personal savings or investments, to spend however you want.

Of course, that whole paradigm is changing rapidly.  (Not that it existed for very long; Social Security dates back only to the Great Depression, and pensions haven’t existed for much longer.)  First, people are living much longer than they did in the past, and are much healthier and more active on reaching retirement age.  Pension plans originated with railroad workers, as a way to compensate workers who spent decades in physically demanding jobs who, when they reached retirement age (IF they reached retirement age), would be unable to do any work to support themselves.  Social Security developed much in the same way, as a way to support those too old and infirm to provide themselves with income through their own labor.

But the days of most people working hard on the rail yard (or farm, or in factories) are largely behind us; many, if not most, workers do white collar work now, and balancing budgets and attending meetings doesn’t leave your body as physically drained as decades of physical labor.  There’s also been a great change in life spans over the decades; when Social Security was enacted, it was designed to cover only the exceptionally long lived, and then, only for the few years they had left on Earth.  Now, living to seventy (or even longer) is the norm, and spending decades in retirement is common.

Next, ‘three-legged stool’ model of retirement, based on pensions, Social Security, and personal savings, is rapidly collapsing.  Pensions are becoming a relic of the past (neither of the two permanent jobs I’ve held since graduating offered any sort of pension to their rank and file, not that I stayed in either position anywhere near long enough to earn a pension).  Social Security faces some trouble in the near future, as outgo will soon match, than exceed, the current tax revenue devoted to it; solutions to solve this problem exist, but usually amount to increasing the Social Security tax or cutting down benefits.  This leaves a large, and only likely to increase, amount of retirement funding responsibility on personal savings.

A train, in honor of the first pension recipients

On the plus side, there are a large and ever increasing number of ways to save and invest for retirement.  The last big change is that funding retirement is increasingly in the hands of the retiring individuals.  This has its downsides; now, everyone from waiters to lawyers, doctors to plumbers, blue collar workers to white collar pencil-pushers has to be knowledgeable about investing, if they ever hope to quit their day job.  On the plus side, this increasing dependence on your own actions makes it possible to control when you’ll retire; save aggressively, and you can retire early, save very little (or nothing at all), and find yourself working to the normal retirement age or longer.

The Future of Retirement

So, what does the future hold for retirement?  We’re probably going to see a much larger range of retirement ages.  Many people will find upon reaching the normal retirement age, that Social Security is not nearly adequate to maintain the lifestyle to which they are accustomed and their savings aren’t enough to bridge the gap.  Many baby boomers who aren’t going to receive pensions (as well as members of Generations X and Y, if they don’t start saving and investing more for retirement) will find themselves forced to work longer to make up the difference.  On the other hand, those who start early, save aggressively, and live reasonable lifestyles will be able to retire much earlier, in their fifties, forties, or possibly even their thirties.  The end result is a wide range of expected retirement ages, from ‘middle age’ to well into your golden years.

Partially due to these early retirees, the concept of retirement is going to be reconsidered.  No longer will it consist of going to Florida (or Arizona, or any of the other retirement meccas), living in a ‘retirement village’ with a bunch of other seniors, and whiling away the days with shuffleboard and Mah Jong.  Instead, retirement is going to look different for different people; while a few may like the retirement village lifestyle (particularly when they become too infirm to care for themselves), other possibilities will exist.  Many retirees use the opportunity to see the world, take up new hobbies, or fulfill lifelong dreams.  As aggressive savings and opportunities for alternate ’side’ income become more common, there’s likely to be a rise of the retired (or at least, working from home) people who live normal lifestyles, except for not going to work every morning.

Finally, there’s probably going to be a rise in ‘mini-retirements‘ or sabbaticals spread throughout the average lifetime.  Rising savings rates  and increasingly common alternative income sources (from blogging to real estate investing) combine with the fact that most people will switch jobs many times throughout their lives (often with a break in between as they attempt to find a new position) will make taking off for several months to a year or two during the ‘normal’ working years a more attractive prospect.

Where do you think the future of retirement will take us?  Will it be mostly the same as what we see now, or will it be nearly unrecognizable to the average twentieth century retiree?  Does anyone else really like the concpet of mini-retirements?

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• How I Review My Annual Social Security Statement