A secure retirement, where all future financial needs will be taken care of, is seen as the culmination of a life well lived and investments well grown. This successful scenario - a picture of an elderly gentleman reclining in an easy chair without a care in the world - is regarded as the “perfect” retirement by many. The stressful period of working hard to pay the bills is now over. It’s time to relax and to enjoy some “me time” without worrying where the next pay cheque will come from.
And yet so many of us don’t make it to a stress-free retirement where all is provided for. Why is that? What is wrong with the system? Let’s take a look.
The evolution of the pension
Since the beginning of time, man has worked to provide for his family right up until he physically couldn’t work anymore. Hunting and gathering, then farming and finally trading and barter, are all hands-on means of existence. Either family or the community took care of the frail or they didn’t and those people simply died. Yes, it was a harsh reality but accepted as the norm.
When the world became industrialised, starting in the 1700s, a new trend of working for wages began. The corporations, factories and other industries soon discovered that as workers aged (and a life of hard work wears out the body fairly quickly) they became less productive. Bosses needed a way to increase production, because that’s where the profits were realised, and so they brought in a mandatory retirement age. Once that age was reached the worker was obliged to leave their employ. They literally just left—no pension, no payout, nothing. In the industrialised world older people were left destitute.
Luckily, the humanitarians among us started to kick up a fuss about the unfairness of this kind of treatment, and so some companies decided to put funds aside in order to pay their workers a liveable allowance for the few years that they were retired before they died. A life of hard work ensured an early death for most retirees anyway.
Another significant change in the workforce happened when World War 2 broke out. Suddenly there was plenty of work generated by the army. A host of new jobs, together with the newly employed spending their salaries, was certain to cause rapid inflation. To counter inflation a freeze on all wage hikes was introduced. In order to retain or attract valuable staff, companies adapted to that moratorium by offering better benefits instead of higher wages. Those benefits included an improved and attractive pension scheme. And so, reasonable pension plans were finally created in the early 1940s.
Once the war ended, a reversal of the employment abundance occurred and employers were again hard pressed to replace older people with younger (more productive) staff. Luckily, the post-war economic boom in America and the UK allowed corporations to use a carrot rather than a stick to entice older people into retirement. Massive media campaigns were launched to glamorise retirement. Retirement was promoted as something to look forward to with money to spend on leisurely activities. It was viewed as a reward for a lifetime of hard work.
Retirement thus became popular in the 1950s, 60s and 70s. By the 1980s, however, corporations were beginning to feel the financial strain of paying ex employees. Various factors contribute to the increased cost of financing a pension fund. If you want a more detailed explanation, read my book, The Best Pocket Guide Ever for a Financially Secure Retirement, which also has lots more information on how to retire in today’s pension climate.
And so corporations, with employee input, changed the retirement fund rules. Now the responsibility of saving enough was shifted to the employee, and was no longer the employer’s concern. So, from the 1980s onwards, an employee had choices as to how much to save towards retirement as well as options to take the money before retirement. If the consequences of these new choices were explained properly, many people still did not to understand them. I still get clients who ask “Is that all that’s in my pension?”.
I believe that the changes in pension structures were explained to employees. I believe that the danger of not taking responsibility for adequate savings was probably also explained. However, it is quite clear that although explained, it was not properly understood. In the last 20 years, retirees have learnt a very harsh lesson – the pension structure that was taken for granted from the 1950s to the 1980s no longer applies.
This is where we are with pension funds today. What you save, and how you manage the accumulated funds, is what you get out. If you decide to spend your accumulated pension savings when you resign from one job and take another, you will have to contribute double towards your pension with the next employer. Do you know anyone who has done that? I most certainly don’t!
To recap, of the 5 000 to 8 000 years (depending on whose anthropology theory you follow) as human beings on this planet, an adequate pension was available from your employer for 40 of those years. I’d say that corporate pension was a fad, wouldn’t you? Now we are right back to fending for ourselves in our old age (apart from a small state allowance—barely enough to keep us alive), and so what are we going to do about it?
Modern choices for sources of pension income
The first choice that we have is what is known as the traditional route. If, from our very first pay cheque, we maximise our contribution to a pension fund, and keep on doing this for our entire salaried life, up to age 65, then we should have enough money set aside to provide an adequate pension. This should be around 15% of your salary.
If you move jobs regularly then each time you move you need to preserve the pension already accumulated and not spend a cent of it. You also need to make sure that the funds invested are performing better than inflation by a good margin most of the time. Pay attention to your annual benefit statements and ask questions about the investment returns. Growth is not just about how much you have contributed. If you follow these guidelines then you will reach your goal of accumulating enough to retire with.
The second option is for those people too close to retirement to catch up on all the years where they either contributed too little or spent what they had accumulated and never made it up again. Sadly, this accounts for most of us. Even if we were diligent, retrenchments or illnesses and other unexpected events can deplete our pension savings if we need to use them in order to maintain our living expenses for a time.
In such a case, retiring at age 65 is not an option. If your employer has a non-negotiable mandatory retirement age, then you need to start looking for work that you can do after age 65, such as consulting or turning a hobby into a full-time work opportunity. The key is to find work that you enjoy so that you can have fun while earning. Also, you will probably have some form of pension and so only need to earn enough to cover the gap. Hard work and long hours are probably not necessary.
This is a time to work at something you enjoy, at your own pace and put all your accumulated knowledge and skills to good use. After 65 years on the planet you have a great deal of experience to share for a living. Some older people actually make more this way than they did before age 65. Plan to be one of them. Start planning now. p
Disclaimer: The information provided is the author’s personal opinion and should not be relied on for financial advice.
Jillian Howard is a financial planning expert and author. She approaches personal finance from all sides: how to manage what you have, how to earn more, and how to plan successful wealth accumulation. She holds a BCom degree, is a CFP® professional and a financial coach, but apart from being qualified and experienced, really enjoys helping people solve their financial challenges. Her mission is to help people understand and simplify their financial planning, because being in control of your money is fundamental to being in control of your life and dreams.