The New Retirement Landscape

Behavioral Finance
Sarah F. Roach, Vice President

Planning for the future involves a number of unknown—often unknowable—variables.  Facing such unknowns, people have a tendency to base their expectations on a few numbers they think they know:  I should retire at 65, expect to live into my 80’s and plan to enjoy 20 years of leisure.  Economists call this too-limited approach “narrow framing,” and it can lead to poor decisions if the assumptions, such as how long we’ll live and how much we’ll enjoy two decades of leisure, are wrong.

At the dawn of the 20th century in the U.S., life expectancy at birth had risen to about 47 years, largely due to reductions in child mortality.  Longevity rates among older people began to rise later in the 20th century, and recent research indicates that life expectancy is continuing to increase among those age 80+.  Between 1840 and 2007, median life expectancy increased an average of about three months per year, and there is no evidence that this increase is slowing.  As of 2007 in the developed world, people 85+ constituted 12% of the over-65 population, and their absolute numbers are projected to increase threefold by 2050.  Even more remarkably, the number of people age 100+ is expected to increase tenfold by 2050.  In fact, according to the National Institute on Aging, dramatic longevity gains among the elderly have led demog­raphers to question what a realistic upper limit for longevity could be.

Sixty-five may be the prime of life in a world where centurions are more common, and many people in their prime have the energy and desire to keep working.  In fact, there was a time when the idea of retirement was a hard sell.  At a 1951 Corning conference on—believe it or not—popularizing the idea of retirement, author Santha Rama Rau observed that Americans did not have the capacity to enjoy doing nothing.  Before Sun City, Arizona coined the phrase “golden years” in a 1959 marketing pitch, companies and the government had to institute incentive programs to get older workers to retire (so younger ones could have their jobs).

With life expectancies increasing so dramatically, we can no longer narrowly frame retirement as quitting work at 65 in anticipation of 20 leisure years.  For one thing, many of us are still not that good at doing nothing and will want fulfilling work well past age 65.  Author Ken Dychtwald envisions people pursuing three to five careers—comprising many jobs—over a lifetime.  Even now, many people in their 70s and 80s are doing work unrelated to the careers they pursued as younger adults.  To quote an article in Inside Personal Finance, “There is a big difference between not having to do anything and not having anything to do.”

If you could know at 65 that fully one-third of your life is still ahead of you, and that you’ll be active and engaged for many of those years, your investment time horizon would reflect that knowledge, since outliving your money could mean disaster.  To quote George Burns, who lived to 100, “Retirement at 65 is ridiculous. When I was 65, I still had pimples.”