Let’s take a minute and look back at the history of retirement. I promise it’ll be more fun than it actually sounds.
The concept of retirement itself is relatively new. For most of our history as humans, we worked until we were no longer physically able to do so. We had to, since the level of wealth wasn’t nearly as high as it is today. The vast majority of people needed to work each day to have enough money to put food on the plate. There was barely any disposable income left over for wants.
Starting about 200 years ago, things changed. The crude form of automation known as the Industrial Revolution meant humans could transfer a certain amount of productivity to machines. This freed up time, increased returns on investment, and led to a boom in consumer products that has only seemed to grow as time went on.
Still, for the most part, humans tended to work until they died. While capitalists reaped the fruits of their investments, working conditions for the average worker were still poor, wages weren’t high enough to really get ahead, and the necessities still cost a lot of the average person’s paycheque. Things were getting better, but they still weren’t great.
The concept of retirement as we know it today has really only been around for about a century. Pensions for the masses was a concept first introduced in Germany back in 1889. Workers paid a tax which went into a fund that provided a pension annuity for anybody over the age of 70.
It’s said that the average person only lived until 45 in those days, so it doesn’t seem like many were around long enough to collect the pension. In fact, the overall life expectancy was brought down by the high rate of infant mortality. Most Prussian workers could be expected to live to about 70.
In fact, the plan was so successful the retirement age was eventually lowered to 65 in 1916. It then collapsed after Germany lost World War 1.
The point is?
There’s an interesting assumption behind how pensions started. A worker was still expected to work for the vast majority of their lives. The pension was only meant to cover their last few years.
Fast forward to today, and the world is a whole lot different. Just about everybody retires at age 65, with a few stragglers sticking around longer because they like their job or because they need the cash. People retiring at 60 is relatively common as well. And many workers between 50 and 60 are essentially forced to retire when they find themselves unable to get work after a layoff.
There’s a movement afoot where folks retire even earlier than that. These people don’t want to work for 20, 30, or even 40 years, so they live ultra-frugally to get an extremely high savings rate. It doesn’t take long to retire if you sock away 80% of what you make.
It’s interesting how in just a century and a bit we’ve gone from a system that is designed to fund 5-10 years of a retirement to an expanded system which is expected to keep a retiree fed and clothed for anywhere from 15-30 years.
And all indications point to this problem getting worse. Medical advances are extending lifespans. Prescription drugs might not be curing our long-term ailments, but at least folks are suffering less. Overall, retirees are healthier than ever.
So does it really make sense that we should expect a retirement of 20-40 years when the average 65-year old these days is about as healthy as the average 50-year old back in 1910? Maybe not.
We’re already seeing indications governments are aware of this. In Canada, pensioners are currently able to start collecting Canada Pension Plan money anywhere from age 60 to 70. But the age of eligibility for Old Age Supplement–think of it like old people welfare, but just about everyone gets it–will soon increase from 65 to 67.
As life expectancies continue to creep higher, there will be two solutions for future retirees. They can save even more today, amassing a bigger nest egg. Hopefully, this cash lasts long enough. Or, they can embrace a longer life expectancy and be open to the possibility of working until 70 or 75 years old.
There are many advantages to working longer. Instead of saving 15-20% of your salary towards retirement, you can probably get away with less. This means more disposable income when you’re younger. If you’re not a slave to saving a big percentage of your income, you can be more flexible with the type of work taken on.
Besides, early retirement isn’t the key to happiness either. I know countless folks who have retired early only to go back into the work force after taking a year or two off. It’s not that these people are sick of work per se, they’re just sick of their current job.
I really think that most millennials won’t end up retiring at 65. They’ll stick around in the work force a little longer. The reason might be financially motivated. It might be because they’re working on something they’re passionate about. It might even be for something to do. Either way, maybe it’s a strategy that should be considered. Even if you’re convinced retiring early is the ticket.