In talking to a number of people about retirement, it has been suggested that the main objectives for preparing for one’s retirement are to:

• Maintain one’s pre-retirement standard of living
• Maintain financial self-sufficiency through retirement
• Be able to retire as early as one can and wants
• Be able to accommodate the non-economic facets of retirement living
• Where possible or desired, pass your wealth to others
• Improve your lifestyle during retirement
• Care for dependants if you need to

If they are truly the objectives of retirement preparation, then I would suggest that for the vast majority of people, retirement preparation has categorically failed them - particularly if we use the current state of retirement sufficiency and sustainability as the benchmark for assessment - particularly in developed countries.

So that my message today is unambiguous, let me state up-front that I will be putting the case that the funding of ‘retirement with dignity’ is seriously threatened by the social, economic, global and technological realities that today’s and tomorrow’s workers are, and will be, dealing with.

Although these changes bode negatively on longer term retirement sustainability, they also provide the impetus and motivation for being bold, brave and lateral thinking, in moving forward.

The change to a healthier long-term retirement structure requires courage from governments, the retirement industry, employers, and of course, the current and future retirees themselves.

In my view, there are a number of important trends that are impacting retirement. These trends have a continuing and fundamental effect on the industry and its ability to provide people with the retirement outcomes that are needed.

There are 14 trends that I consider critical.

1.  People are living longer (SLIDE 2)

 

Life expectancy has risen dramatically over the last century amongst the world's wealthiest populations from around 50 years of age, to over 75 years.

This increase can be attributed to a number of factors including improvements in public health, improvements in work safety, decreasing prevalence of smoking, improved nutrition, increasing proactive medical testing, improved education, among a wide range of health and related initiatives.

People in developed nations are living in good health as much as a decade longer than their parents did, not because ageing has been slowed or reversed, but because they are staying healthy to a more advanced age.

As a result and coupled with a decline in the fertility rate, many major industrial countries are facing an ageing population. In Japan for example, adult incontinence diapers are outselling baby diapers for the first time.

According to the Australian Institute of Health and Welfare, older Australians, for example, are living longer and, on average, getting more years of life without severe or profound limitations to their basic daily activities.

The report, Changes in life expectancy and disability in Australia 1998 to 2009, shows that between those years, life expectancy at birth has risen from 75.9 years to 79.3 years for males, and from 81.5 years to 83.9 years for females, and almost all of this increase is disability-free years.

According to the Institute, the "downside", if you like, to living longer, is that as the population ages there is expected to be an increasing number of older people living with a disability. But it is important to remember that disability does not necessarily equate to poor health or illness.

According to a 2011 report, Australia moves from about 20 per cent of the system in pension-phase in 2010, to 40 per cent in 2021. Although this doesn’t sound like much, it’s a 100% increase.

According to the 2009 Mercer report, “Securing Retirement Incomes” it’s predicted that the Australian system will switch from an accumulation system to a draw-down system somewhere between 2020 and 2025.

2. Older people are working longer (SLIDE 3)

 

When we consider employment longevity, (SLIDE 4) we note that participation rates of older workers in most OECD countries, for example, were higher in 2008 than they were in 1970.

The main reason that the share of 50-64 year-olds that are active in the labour market has increased, is the growing labour-force participation of women. Between 1995 and 2008, for example, the participation rate for women aged 50-64 in OECD countries increased by around 11% on average, compared with just 4% for men.

(SLIDE 5) On average in OECD countries, about 75% of older men were economically active in 2008, compared with just over 50% of women.

(SLIDE 6) In Australia, according to the Australian Bureau of Statistics, in 2009-10 a quarter of the population were aged 55 years and over. Around one third of them were participating in the labour force. People aged 55 years and over made up 16% of the total labour force, up from around 10% three decades earlier. The participation rate of Australians aged 55 and over has increased from 25% to 34% over the past 30 years, with most of the increase occurring in the past decade.

Not surprisingly, labour force participation declines with age. In the year to June 2010, 71% of Australians aged 55-59 years were participating in the labour force. This compares with 51% of 60-64 year olds and 24% of those aged 65-69 years.

3. Inflation and the cost of living longer is increasing – medical, housing, services (SLIDE 7)

To state the obvious – inflation eats away at savings.

To state something else obvious – for the average person, the growth in earnings from work or savings generally falls behind the increasing cost of living.

Apart from the common expenses of living and putting a roof over one’s head, the critical costs related to those ages of retirement are medical and associated costs.

According to the US Bureau of Statistics, the total cost for a US couple over 65 to pay for medical treatment over a 20 year span is $215,000 while the average savings for a 50 year old is a mere $43,797. That represents a huge gap to be made up in a very short period. But then, the US health system is out of control and not a great benchmark for other countries.

The Association of Superannuation Funds of Australia Retirement Standard, benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in their post-work years. It’s updated quarterly to reflect inflation, and provides detailed budgets of what singles and couples would need to spend to support their chosen lifestyle. (SLIDE 8) This Table illustrates the latest costs for Australia.

If you extrapolate those costs for the very low current yield rates on savings in Australia at the moment, then the required capital needed to service these expenses exceed the vast majority of superannuant’s assets.

4. People are saving less (SLIDE 9)

 

A 2009 Prudential survey in the US revealed that over half of those aged 45-75 are behind in their retirement planning.

If we consider those hitting the retirement category now, i.e. the Baby Boomers, RaboDirect's 2012 National Savings and Debt Barometer, revealed that 40% of Baby Boomers who expect to retire with a mortgage are planning to sell their property in order to pay it off. At the same time, 30% of Boomers intend to use their superannuation to pay off their mortgage.  

(SLIDE 10) If you consider the Mean Balances in this Table, then you will easily deduce that there’s not much left of these balances after the mortgage is paid. Certainly not enough to fund the cost of living discussed earlier.

According to a HSBC study, nearly 60% of Australian respondents think their financial preparations for a comfortable retirement are inadequate: 37% feel they are not preparing adequately and 22% are not preparing at all.

People run the risk of living long beyond their retirement savings: on average, Australian respondents expect their retirement to last for twenty one years, but their retirement savings to last for only eleven years.

The HSBC study also found that respondents understood the importance of preparing for retirement from early on in life: on average they saw the age of 36 as the latest by which people can start planning financially and still expect to maintain their standard of living in retirement.

(SLIDE 11) Interestingly, more than in nearly any other country that HSBC surveyed, respondents in Australia prioritised saving for the short term goal of a holiday over saving for the long term goal of retirement. When asked if they could only afford to save for one of these options for a whole year, 53% chose a holiday, whilst only 36% chose retirement.

5. Money saved during one’s working life needs to fund a longer retirement (SLIDE 12)

 

If people are living longer then they need to fund a longer retirement.

As they are also working longer, they are contributing to this lengthening of retirement duration but at a reducing rate since they are generally moving to part-time or casual working arrangements.

Unfortunately as people age, their earning capacity in revenue terms also diminishes – sometimes legitimately and sometimes through the consequences of ageism or active discrimination.

If a young manager with little meaningful experience doesn’t understand the value of experience that comes with mature workers, then the negatives associated with mature workers outweigh the benefits of employing the mature worker.

However, although people are working longer, it appears that the gap between working life and life expectancy is still growing, thereby requiring additional funding.

6. During economic downturns, earnings from liquid investments fall (SLIDE 13)

 

Leaving aside periods of hyper-inflation; when economies are depressed or slow, then so are yields on investments – the lifeblood of self-funded retiree’s. (SLIDE 14)

In Australia, if you had $100,000 on deposit in 1990, you would have earned before tax about $12,750 at the prevailing rate of deposit interest. (SLIDE 15) In 2013, it would be about $2,750. Therefore, if you need $50,000 per annum to retire, then in 1990 you would have needed savings of approximately $400,000. In 2013 you would need $1.8 million. And those figures ignore the impact of taxation.

To add insult to injury, once you are out of the workforce, then it is virtually impossible to get back into it at a significantly later age to augment one’s capital base. It’s generally too late – even at a lower salary or position.

7. People are having fewer children (SLIDE 16)

 

While child mortality has fallen dramatically over the last 100 years, which is wonderful, people are having fewer children as global well-being and wealth improves. (SLIDE 17)

This trend is generally evident around the world.

In developing countries with no or limited retirement options, it means there are fewer children to look after parents and grandparents when they leave the workforce or cease being economically productive.

In developed countries, it means fewer people to earn revenue upon which tax is generated to fund a social security system’s financial requirements.

Japan, for example, has had negative growth in population for many years. I saw a report recently that suggested that at Japan’s current rate of growth, in the year 3000, there will only be one Japanese person left. Maybe not, but you get the picture.

8. In a globalised world, economic downturns are broader, deeper and longer  (SLIDE 18)

 

As the world globalises, it enjoys the benefits that globalisation brings, such as bigger markets, fluidity of finance, greater access to products and services, and greater access to technology, and so on.

It also brings with it some significant negatives such as global competition, and what I call ‘disassociated contagion’ – what that means is when someone else sneezes, then you’re the one who catches the cold: in other words - when your principal overseas customer or supplier slows down or goes out of business then that causes you to do the same – or worse.

Just look at the global impacts of a ‘serious cold’ on Wall Street a few years ago – many countries are still under doctor’s supervision even today while some have moved into palliative care.

(SLIDE 19) Because of the degree of inter-connectedness between countries, companies and industries around the world, it appears that the depth and duration of these downturns are getting longer and more severe.

This inevitably means higher unemployment, lower earnings, lower savings and lower retirement accumulation. Often these can occur with very little warning and no influence or control to avoid them – the Wall Street collapse was a perfect example.

9. The under-employment of our youth (SLIDE 20)

 

Youth unemployment in some economies around the world is huge – as much as 60% and more in some areas. (SLIDE 21)

This does a few things.

• It defers entry into the workforce.
• It lowers aggregate tax revenues.
• It lowers individual savings.
• It adds burden to a country’s social security resources and infrastructure.
• It lowers personal self-esteem and feelings of self-worth among those who are unemployed.

It ultimately forces today’s youth to work longer in their working lives to fund their own retirement.

10.  The falling relative proportion of tax-generating workers (SLIDE 22)

 

With falling birth rates and high youth unemployment, the number of people to generate required tax revenues to fund social security benefits is falling on a smaller proportion of people. (SLIDE 23)

Add to this the growth of the ageing population as a proportion of total population; then you have a recipe for severe pressure on the retirement servicing sector.

11.  Late entry into superannuation by the Baby Boomer generation (SLIDE 24)

 

In Australia, which is considered a leader in the provision of superannuation services, superannuation did not become generally available until the 1980s. (SLIDE 25)

Therefore, for many Baby Boomers who entered the work force many years before the start of superannuation, they entered the ‘forced saving’ environment late - certainly too late to accumulate sufficient retirement savings.

Many Baby Boomers in Australia are starting to realise that they are really in trouble and need to contemplate seriously their retirement options. Tragically for many – their options are few.

This would account for the relatively low Mean Superannuation Balance that we saw before.

12.  Technology and the virtual workplace (SLIDE 26)

 

A number of significant changes have occurred and are still occurring in the workplace.

People are becoming Virtual Workers. Sometimes this is only a matter of where one conducts one’s work and has little other impact.

At the other extreme, it means that you work on tasks only when needed, which often forces a new arrangement between employer and employee.

This is forcing people of all ages out of organisations and into their own businesses working under contract.

This new method of working, made possible by exciting and powerful new technology, brings with it both positives and negatives.

The positives generally revolve around lifestyle and flexibility. The negatives generally revolve around non-funding or under-funding of savings as well as increased employment-risk and increased revenue-generation risk.

For those used to the new technology (i.e. commonly the younger generation), this is sometimes a new lease on life. For those not as proficient with the new technology (i.e. generally the older generation), this can be stress-inducing, and even an employment-related death sentence.

The point here is that change must be embedded into us – as a way we think. The status quo is a thing of the past. No one can predict where technology will take us in 20 years, let alone in 50 or 100.

The implications on revenue generating capability and therefore on saving accumulation are obvious.

13.  Changing work emphasis from attendance to performance (SLIDE 27)

 

Employers these days care less about attendance and care more about work-outcomes. Fair enough I suppose.

But this trend has impacts that feed the previous discussion on technology.

If you have been in a work culture that valued loyalty above all else, then being forced to comply with tough KPIs and having your employment dependent on achieving those KPIs, often outside your complete control, becomes nerve-wracking if you’re not used to it.

When the KPIs are being driven by managers younger than the employee’s children, then you have some real social, cultural and employment issues.

Furthermore, regardless of the age of managers, people tend to be working harder than ever before. On average, and despite the virtual employment environment, Americans now work longer hours than workers in most other industrialized nations.

The United States recently surpassed Japan, which previously was the epitome of people who worked too hard. It’s common for many people to work 50+ hours per week in developed economies.

14. Lifetime career changes (SLIDE 28)

 

In my parent’s generation, one was expected to enter a career and stay in it all your working life.

When I was young, one was expected to stay in a sector or industry all your working life, even though you might change employer a couple of time.

The number of career changes (i.e. not changes of employer in the same sector but totally different work activity) that a new entrant into the workforce can now expect is up to 5 to 6 major changes over his or her working life.

Now the average duration of a CEO in a medium to large corporation is only 3 to 5 years.

Apart from an exciting, varied and challenging life that this trend brings, it also brings a downside.

Not all career changes are smooth - some are redundancies or company closures. Sometimes there may be significant gaps between jobs or income generating activities.

These gaps are non-income producing and therefore periods of non-accumulation of savings. Over a life-time, the savings impacts can be significant.

CONCLUSIONS

 

So what conclusions can we draw from these trends:

1. If people are living and working longer, then they stay in the work-force longer. But they may not stay doing the same things or doing them in the same way, from the same location or for the same boss, yet they can still be doing meaningful, income-producing work.

2. Increased age brings increasing likelihood and prevalence of disability. Often some disabilities preclude some types of employment but only a very few disabilities preclude all economic activities. In other words – most people can do something.

3. In theory, the longer you work then the shorter the retirement one has. However if you factor in lengthening life-expectancy, then despite working longer, you will still have a longer net retirement duration.

4. If you work longer, then you will earn more and generate a greater contribution to your own retirement. But since your work-intensity is less (i.e. probably not full-time) then your earnings are not optimised for your age or your experience. Generally, and unfortunately, the older you are, the lower your earning power over a certain age threshold.

5. Work style (i.e. part-time, casual and self-employed) is impacting on one’s saving’s continuity as well as on saving quantum.

6. Costs continue to increase, particularly medical and associated expenses, while the relative buying power of one hour of paid work is diminishing.

7. Neither children nor the social security system will be sufficient to fund the retirement of the majority in the years ahead.

8. The number of taxpayers required to fund an increasingly older demographic is proportionally falling.

9. One should not discount the social and psychological importance of undertaking meaningful activity as one becomes older.

10. Retirement savings are not sufficient to fund retirement for the average (i.e. the majority) of people, let alone to fund the longer retirements now being projected.

11. Although economies will recover, employment will improve, unemployment will generally fall and savings will again rise; it is all only temporary until the next downturn. The current structural deficiencies will remain unless a revised sustainable model can be developed.

12. Africa is not Australia, the US or the OECD. Each African economy has (or doesn’t have) its own retirement industry with its own metrics and character. However, as the economies in Africa grow over time, and as personal wealth grows, it is inevitable that the issues and problems identified elsewhere in the world will impact it. Certainly, there may be variation in timing, manner, type, form, frequency, and degree of impact of these issues – but they will still occur and they will impact retirement here.

 

MOVING FORWARD

What then can we do to ensure a more reliable, cycle-resistant retirement structure?

I don’t for a moment want to suggest that the following strategies are easy or instant. They’ll take time and a monumental shift in thinking – by everyone - and a lot of courage.

 

But if no attempt is made to build for the future, then the future will cause much pain. And if change doesn’t happen then the industry and government will be back to the same place – or worse – in a few years’ time.

The suggestions here do not imply that current structures and strategies should be replaced. Rather they should be augmented to help deal with a difficult, large, expensive and very long term requirement.

 

I suggest 8 strategies that can make a difference.

Strategy 1: Employment of mature workers (SLIDE 29)

 

It is really important to ensure that people stay gainfully occupied according to their ability and desire, as they age.

However, when you promote one sector over another, the other always complains. If you promote the employment of mature workers, then younger workers might be perceived as being discriminated against – and that has long term ramifications as we have seen.

 

The thing about mature workers is that most commonly, they aren’t pursuing career advancement as their principal goal, and they commonly don’t have the same long-term financial demands that younger workers do with young families, new mortgages, a consumptive life-style, and so on.

In other words, they are easier to please and more flexible than they are given credit for – and certainly more accommodating, less self-centred and less flighty than subsequent generations.

An Australian study over 10 years ago, Business, Work and Ageing, Profiting from Maturity, found that there is evidence that mature workers can deliver an average net benefit of $1956 per year (some 12 years ago) to their employer compared to other workers due to high retention rates, lower rates of absenteeism, decreased recruitment costs and greater return on investment.

There are a number of ways to keep mature-aged workers working without negatively impacting others, but unfortunately I don’t have the time to discuss them here but they largely relate to in-work flexibility.

 

It is easier to keep existing workers working than to re-position them into other activities – although that is still highly achievable.

The point is that while they work, they earn and they have a better capacity to accumulate savings and contribute to their own retirement.

Strategy 2: During employment, help all workers build additional interests and revenue sources (SLIDE)

 

Often it’s challenging to start thinking about retirement when one’s thrust into it or it ‘sneaks’ up on you. Many people avoid thinking about retirement as if it’ll never happen to them. It is certainly better than the alternative of not making it to retirement, yet that doesn’t mean that people are ready, or have sufficient reserves (or willpower or capacity to generate them) the moment they are retired.

If people were encouraged much earlier in life to develop other meaningful interests that would eventually be able to earn them revenue; then when retirement appears, they immediately have options that can occupy and reward them. In other words, they develop these ‘category two’ activities in parallel with their ‘main job’ and with the employer’s knowledge and support, provided they don’t negatively impact the employer’s interests.

The enabler that makes this possible is often technology but it’s not the only way to think about this. Time doesn’t permit me explain the many ways that this can occur but the driver behind it is this philosophy: “employment at any particular time is merely a stepping stone to the next activity type – it is rarely the final destination.”

 

One works because it enables the employee to satisfy his or her needs, and when those needs change, so the employee takes another step that he/she has considered and planned for.

Strategy 3: Establish Mature Networks (SLIDE)

 

Over the years I’ve established a number of networks for specific purposes. A year and a half ago, I established a network of mature and experienced people. We have 24 people in the network with approximately 800 years of experience between us. That is also 800 years of contacts, networks, clients and accumulated wisdom.

We meet at least monthly to support each other and generate income opportunities, open doors and solve problems. No money is involved in being a part of the network but people are invited and assessed for suitability. It’s based on trust and reciprocity. “I’ll help you because I know that when I need it, you’ll help me.”

 

The network has generated hundreds of thousands of dollars of revenue opportunities in its first year and has provided extensive support and mutual assistance – all at no cost to members.

The point is this: if you’re looking at retirement alone, it’s a very scary prospect – particularly if your savings aren’t enough to fund you. If you have people who can help you (and not take you for a ride), then you feel better about yourself, more optimistic about the journey ahead and more able to cope.

My suggestion is that everyone should be in a similar group or network – and the group should start when you turn 40, and not when you turn 65.

Strategy 4: Mentoring (SLIDE)

 

People need mentors to help them consider and work through issues. I don’t mean a financial planner, but someone who is experienced and who has no vested or conflicting interest who can guide people more effectively to pursue their own interests. This is at no cost to the mentee.

In the same way that Mature Networks help people; so do good organisational and non-organisational mentors.

 

I have mentored hundreds of people for some 37 years – and I can confidently say that my biggest achievement has been to give them each sufficient confidence in themselves to regard their own happiness and destiny as the most important thing in their own lives – and their life in retirement is critical to that sense of long-term happiness or contentment.

To achieve that, they need to start thinking about their life in and at retirement as early as possible. What decisions do they need to make when they are 25, 35, 50 or 60 in order to achieve the retirement they want or need? A mentor can help the individual with the issues that need to be considered to answer this question.

 

My suggestion is that all people from the age of about 25 should find a mentor to help them consider the key decisions in their lives.

I further suggest that all people over about 55 should mentor someone.

 

Strategy 5: Education and literacy standards (SLIDE)

Education and literacy are fundamental to career success. That doesn’t mean that people without it can’t succeed – becomes some do – but it’s so much harder and rarer.

The best way to provide for long term retirement adequacy is to provide for career adequacy. And the best way to provide for career adequacy is through education.

Adequate education gets you to a certain level and not much further. Good education opens the door of imagination, understanding and opportunity. In today’s world, we see young educated and imaginative people doing great things that my generation never even dreamed were possible outside the realm of science fiction.

 

Feed that potential with education and continue to stoke the fire – when young people make it, they bring their peers and families with them.

You need to stoke that fire by making access to education as easy and as broad as possible.

Strategy 6: Education of women (SLIDE)

The best way to get the kids to go to school is to make sure their mothers have been to school.

Numerous studies have demonstrated that the key variable to a society elevating itself and being self-sufficient is the degree that the women within it have access to and are encouraged to pursue education.

Strategy 7: Get youth employed as early as possible as a matter of urgency (SLIDE)

If youth are unemployed or under-employed then you have a problem.

Aside from a variety of social issues that youth-unemployment creates, you have a retirement problem in the making.

All effort and strategies should be used to see youth gainfully and meaningfully employed as soon as their secondary education is completed. Getting all youth through secondary education is really important – even though it might be really difficult.

Normally tertiary educated students have a reasonably well-attuned employment motivation and credentials to suit prompt employment.

But in most societies, particularly in the developing world, the tertiary educated are the minority.

Strategy 8: Stop using the term ‘retirement’ – use something like “Whole of Life Financial Provisioning” (SLIDE)

 

And now for a really radical thought: stop using the term “retirement”.

We have seen that in the trends we discussed earlier, people are working longer and their work diminishes over time – but they still work.

Life is a continuum where soon, the old concept of retirement will no longer apply.

You may stop working for a particular employer at a particular age, but you will, in all likelihood, still do things (or want to do things, or need to do things) that have an economic driver – at least in part.

If you have worked for many years from home as a contractor, then what does your 65^th birthday have to do with your work. Certainly, you may choose to cease active economic activity, or you may choose to lessen its volume. But at what point are you effectively “retired”?

To be “retired” you must accept the concept of retirement – i.e. of stopping what you were doing. If you don’t accept the premise, then does that mean you haven’t really retired?

Isn’t the issue underpinning retirement an issue of whether you have financial sufficiency for the rest of your life? During parts of your life, it may be provided from direct labour or economic activity of some sort. At other stages, it will be derived from interest or dividend or pension.  

I firmly believe that people who accept the concept of post-formal-work as a phase of life are happier than those who see retirement as “cessation of work”.
 

Those who regard their older years as merely a part of a full life that changes in form and nature; rather than being the cessation of all meaningful activity; are more willing to prepare effectively for it.

Just as babies transition to childhood and then to teenagers; adults transition from work and career growth and escalation through its peak to eventually slow and be a partial activity.  I know many 80 year olds who can out-think and outsmart people 50 years their junior – and who still make a contribution to life – and get paid for it.

CONCLUSION

In conclusion ladies and gentlemen, allow me to sum up as concisely as I am able.

Retirement has a problem. Although continuing government support is both required and desired, the trend must be toward people making a greater ‘contribution’ – financial and otherwise - to their own well-being in their later years.

This needs to start early and continue throughout one’s life.

To enable that to happen, government, society, employers, workers and retirees need to have the foresight and courage to plan it wisely, implement it effectively, and govern it judiciously.

Thank you for your attention.

[If you would like a copy of the slides that go with this presentation, then email me at jacoby@jacobyconsulting.com.au]