Retirement today bears little resemblance to what it was for prior generations. In the United States and many other parts of the world, the way people prepare for retirement has changed dramatically. Few people can look forward to the 20th Century ideal of living comfortably off a pension. Even those who have saved in retirement accounts are faced with retirements that may last two to three times as long as was the norm a generation ago.
Increasingly, the burden of funding retirement has fallen on people’s own shoulders. It’s not surprising that growing numbers of people are working past what was once thought of as retirement age, whether because they want to or need the income. Today, 20% of Americans 65 or older are still in the labor force compared with 13% in 2000.
This transformation of the retirement landscape can be bewildering. And it’s not just a U.S. phenomena – it’s happening around the world. As part of our global retirement research we spoke to couples in Mexico, England, Chile, Australia, Germany and here in the U.S. to see how others are preparing for 21st century retirements.
But first, let’s explore how and why retirement is changing across the globe, and we’ll finish up with some thoughts about what you and your family can do. The fact is comfortable retirement is within reach. But it takes resources, knowledge and commitment to get there. There are three factors that will shape retirement in the years ahead:
Longer lives, fewer children
Around the world, people are living longer thanks to improved standards of nutrition, medicine and public health. Worldwide, some 800 million people are 60 or older. By 2050, the number will more than double to about 2 billion. As people live longer and have fewer children, meaning fewer people paying into the system, skewed populations will put enormous pressure on public and private pensions. Specifically, the World Bank puts the global dependency ratio at roughly 54% today. In other words, the proportion of people who have aged out of the labor force is higher than those who are still working.
The World is Getting Older
Of course, for individuals, the prospect of a long life is great news. But it does raise a major question: Will people have enough resources to live comfortably all those years or will they outlive their money? Most people react to the possibility of a longer life span by stepping up their saving, hoping to put away enough money to cover any eventuality. But the total size of your nest egg can be misleading. As I’ll explain, it’s more useful to think in terms of the annual income your savings will generate. That makes it easier to figure whether you’ll have the means to pay the costs of a long lifetime.
A gap in retirement savings
The stark reality is that many people are falling short on their retirement savings goals. BlackRock’s 2015 Global Investor Pulse Survey finds that, on average, Americans ages 55-64 require an average of $45,400 annually to satisfy expenses in retirement. Unfortunately, they’ve only saved an average of $136,200, yielding them just $9,153 of annual income – a gap of $36,300, excluding Social Security.
The good news is that even those in late middle age can take steps to shore up their retirement finances. It’s vital that people set—and stick with—larger annual savings targets. They might also think about continuing to draw a paycheck beyond traditional retirement years.
Shifting the focus to income
When they think about financing retirement, most people focus on wealth accumulation—building a savings stockpile big enough to pay for living expenses, discretionary items like travel and, eventually, the costs of special care. Setting aside something for kids or elderly parents may also be part of the equation. The trouble is, individuals have no way of knowing how long they’ll live, which means they can’t tell how long their savings will last. So they agonize: Do I need $1 million, $2 million, $3 million? What if something awful happens? Meanwhile, their mood swings with every change in the value of their 401(k).
We believe it’s important to look at retirement investing in a different way. Instead of focusing on the size of the nest egg, we need to think in terms of retirement income. How much annual income will you need to fund the lifestyle you want? If you are able to plan to achieve a specific retirement income goal, having a plan feels more meaningful and relatable to our daily lives.
What does this mean in personal terms? Remember this is not simply an American problem – it’s felt across the globe. While retirement systems may differ from country to country, here we are focusing on some common themes.
What it’s like to prepare for retirement
We recently spoke with couples nearing retirement age in the United States and five other countries. Each country is different in how retirement is financed and every couple’s circumstances are unique. Yet, we found remarkable similarities in the sorts of things they hope for, what they worry about and the way they think about the next stage of their lives.
Juan Antonio & Yolanda
Juan Antonio and Yolanda live in Northern Mexico with their youngest son, who recently finished college and is looking for a job. They had to scale back on expenses to pay for private college for their children, and are both still working to rebuild their savings.
They both love what they do. He’s been in sales all his adult life and she’s spent decades teaching English and writing in elementary schools. Juan Antonio says he needs to continue working for five more years. If he retired today, his pension would amount to the equivalent of $320. Yolanda has no pension and will teach as long as possible. “We plan to save as much as we can from the extra income I could earn in another five years,” Juan Antonio explains. For now, they watch their expenses. “We must buy only what’s necessary in order to have some luxuries for Christmas and family gatherings,” Yolanda says. Juan Antonio adds: “Money – or the lack of it – is a concern as we age. I didn’t think about a retirement plan when I was younger. If I had saved the right amount of money since then, I would not be in the situation I am now.”
When they do retire, Juan Antonio and Yolanda say they’ll continue doing the work they love, though scaled back. Juan says he will give professional sales advice and Yolanda says she will continue teaching in some capacity. Both would like to travel.
Jim & Lyn
Surrey, United Kingdom
Many people fear losing their jobs, but Lyn says she’s sorry she wasn’t laid off after a merger a few years ago. Now she’ll have to wait until she’s 60 before starting to collect her pension. After years on the job and no children to care for, Lyn and Jim are more than ready to move on to the next phase. They consider themselves to be very fortunate because they expect a substantial income from their workplace pensions, supplemented at 66 by state pensions—enough to keep up their standard of living and pay for a life of travel and adventure.
When asked whether she’s concerned about running out of money if they live to a very long age, Lyn says she and Jim will have the equity of their home as a backup. Jim is also confident that they will “spend more in our early years of retirement knowing full well that we will slow down in later years.” Their plan is to wait until they can pay off their mortgage and collect their retirement pay. Then there’s no shortage of things on their wish list: camping, theater, socializing, and maybe a year in Australia. Lyn says she may want to get a part time job or do charity work. “I don’t want to just retire and stop – I want to retire and take a different direction for a few years.”
“We want to enjoy life,” Jim says.
Alberto & Nory
Leisure after a lifetime of work is out of reach for Alberto and Nory. Alberto plans to retire this year, but he’ll have to find another job. His income from one of Chile’s mandatory private pension systems will be the equivalent of $210 per month, about 15% of his current salary. For context, the standard amount for income in a defined contribution plan is 20% to 25% here in the U.S.
“It’s easy to run out of money in retirement here because the money you have in your pension isn’t enough to survive on each year after year,” he says. Nory will collect the $75-per-month pension available to homemakers.
“Taking care of my three children is the most important thing,” Alberto says. “I will keep on working to make sure they are taken care of and maintain our lifestyle.” Their children are all employed, and have children of their own, but Alberto and Nory say they help them when they can.
For now, Alberto and Nory will continue to work and spend time with family. The couple has been fixing up a home on land they own in their hometown of San Carlos in Southern Chile. “I really want us to move back to San Carlos, as it’s on the countryside where expenses are lower and life is more relaxed. But that will have to wait until our grandchildren are older and able to take care of themselves,” Nory says.
Indra & Naina
Indra and Naina came to Australia from Africa in 1999 and became citizens in 2003. They were middle-aged when they migrated and will qualify for only small public pensions.
That means more years of work for both of them. Indra says he’d love to work on the house they recently built and spend more time following the sport of cricket. But he needs to keep up his foreign exchange business for at least another three to five years. Naina expects to continue working as long as she can. Eventually, they’ll cobble together retirement income from pensions, savings, and property investments. They may also get some help from their two children, who are ages 33 and 29. Indra explains, “We’re hoping our family will support us as they grow older or we will have to scale back our lifestyle.”
Indra and Naina do worry about running out of money, and spoke to some retirement planners at their local bank. They were advised to work as long as possible to boost their savings and also trim their expenses when they do retire. When that day comes, Naina says she wants to pursue further studies in science and wants to help raise any future grandchildren. “I just look forward to spending more time with my family,” she says.
Jörg & Birgit
In the former East Germany, incomes are smaller than in the West, which means smaller pensions too. Jörg owns his own business and thus only paid into the state pension when he was an apprentice for three years. As a result, he expects to get only 60 euros per month from the state pension after he retires. So Jörg and Birgit bought three apartment buildings to boost their retirement income. They aren’t sure how much longer they’ll work. They won’t be able to collect pensions from their business for another 10 years, but Jörg might retire sooner. “I hope I can live off the rental income,” he says.
Brigit and Jörg have three sons. Two finished college and the third just turned 18. “We’ll of course help him get through college,” Jörg says. “We’ll always be there for them if they need us” and he hopes to someday leave the rental properties to the kids.
When they do retire, Birgit says she wants to travel while keeping her home base in Germany. She can’t wait to be a grandmother. As for Jörg, he’ll spend more time with his hobby of breeding sheep and, he says, “I’m looking forward to sitting in my garden in the morning.”
Hugh & Nanette
San Francisco, United States
Hugh and Nanette have lots of retirement options. They expect income from several sources, including retirement accounts, Nanette’s workplace pension and rent from property. Like many Americans, they have 401(k)s from previous employers that they’ve rolled into IRAs. They don’t plan to collect Social Security until they’re 70, when they’ll qualify for the maximum benefit. “We both like working and want to continue doing so,” Hugh explains. “I won’t have to work longer than I want to, but what I’m doing might change.”
Hugh says that while he used to worry about his money running out at an old age, “it’s a little bit less of a concern right now. It’s really more about protecting ourselves against catastrophic events, like the recession we just went through.”
Hugh says he really started looking at his retirement plan ten years ago, doing research on his own. “Our saving strategy is guided by long term thinking and not being too reactive day-to-day,” says Hugh. “Basically, we try to stick with a plan.”
Thanks to careful planning, saving discipline and late retirement, they probably won’t have to cut back spending when they quit working and will still be able to leave something for Hugh’s daughter from a previous marriage. They will have plenty to keep them busy. Hugh is a dedicated photographer. Nanette does her own writing and is active in local government. And they’re avid adventure travelers. “We just want to be happy and useful and do a variety of exciting things as long as we can,” Nanette says.
It begins with knowledge
A look at the evolving global retirement landscape shows challenges to be sure, but opportunities as well. In advanced and developing countries alike, pension systems are being transformed in many different ways and people are finding they have more responsibility to take care of themselves. At the same time, the range of options for financing retirement is constantly expanding. As the retirement toolkit grows, planning and preparation are increasingly rewarded. Opportunities to work are proliferating too—not necessarily the daily grind that people long to leave behind, but creative alternatives including start-up businesses and part-time, home-based and contract jobs.
The people we spoke with come from faraway places at different stages of development. But they are all redefining retirement—thinking about the next phase in different ways than the generations that came before them. It’s not always an easy road. Some of our couples are working longer than they want or facing lower incomes after they retire. For all of them, retirement planning is more complicated than when people could count on a public or private pension to carry them through. But our couples are more youthful and healthier than previous generations. They have more choices available to them. And the world is a much smaller place—something most of them are determined to take advantage of.
In every country, there are opportunities to improve public and private retirement systems to help people live better. People require the knowledge to make wise choices, the resources to live well and the tools to accomplish their goals.
Chip Castille, Managing Director, is BlackRock’s Chief Retirement Strategist heading the Global Retirement Strategy Group.