In Search of a New Approach to Whole Life Planning

Chart detailing life expectancy through different historical periods, ranging from Neanderthals at age 30 to the present day at age 85 for women, featuring milestones and health challenges of each era.

I recently attended an event in which an intelligent and talented “retirement coach” presented to us on the changing nature of retirement. And although I didn’t disagree with much of what she said, afterwards I couldn’t help thinking that the retirement paradigm she (along with just about everybody else) uses is horribly outdated and needs to be scrapped altogether. For at least the last half-century, we in the industrialized world have reacted at the margins to changes in wealth, work, and expected life spans. Perhaps it is time that we take a step back and try to re-envision the whole picture. I’m going to offer a few ideas toward doing that here. It certainly won’t be the end of the story, but I will be content if it serves as a useful beginning.

The Strangeness Of Retirement

Most people don’t stop to think about the fact that “retirement” is a completely modern concept. For all but the most recent of human history, including most of the modern era, people simply did what they did in life until they died. There was no point at which they stopped living their adult lives and “retired” to do something else. Of course, the fact that human life expectancy was so much shorter than it is now made this virtually a given. Most individuals simply died in the middle of their life activities, victims of violence, accident, childbirth, or disease. If one did survive until a relatively old age, there were always families to care for and tasks to perform to the best of one’s ability until the end. Work may have changed to become more age appropriate, but seldom stopped altogether. Retirement simply didn’t exist.

By 1900 this had changed. The industrial revolution had – at least in some parts of the world – produced the wealth required to lower infant mortality, provide people with better food, decrease public health risks, and stem the incidence of accidental and violent death. Life expectancy exploded, and this trend continued throughout the 20th Century. As a direct consequence, for the first time in history our bodies began to be able to outlive their capacity for the activities of adulthood that had previously been expected of them.

At the same time, the industrial revolution also changed the nature of work for many people in industrialized societies. In many cases, individuals lost the kind of close identification and social association with their work that previous generations had had. Although some observers view this phenomenon of “alienation” from work as a pure negative, I think it cut both ways. It freed many individuals who would otherwise have been doomed to work in the profession or trade into which they had literally been born to pursue a trade or calling of their choice. This certainly includes women as a class, who previously had had only one viable option for life work, that of being a wife and mother. However one ultimately judges this development qualitatively, the fact is that if one can choose where to “go to work” as a young adult – as opposed to being born into a station in life that includes one’s work – then one can similarly choose to change or stop that work at some point. Work morphed from “what a person was” to “what a person did.”

Ultimately, the physical need to stop work coincided with a psychological change that enabled changes in adult work-life patters, and the foundation for modern concept of retirement was laid.

Retirement And Money

One key component of our modern retirement puzzle is still missing, however, and that is how to fund this completely new phenomenon of a period of non-productivity at the end of one’s life. Here again, it is both instructive and important for us to realize how modern retirement funding schemes were born and developed.

German Chancellor Otto von Bismarck famously created the idea of a state-funded old-age pension in the 1880s in response to a threat from socialist movements of the time. If the new industrial workers couldn’t be expected to save enough for this new period of non-work, perhaps the state should assume some of the responsibility – so the thinking went. Bismarck, however, was anything but financially naïve. The “retirement age” of 65 that he established – and that has become the de facto standard retirement age ever since – was approximately 5 years older than the average life expectancy of a man who began to work at age 20 in 1880. Clearly, half of all working men were never expected to attain “retirement age”. And women, who didn’t perform paid labor, were excluded entirely. As a result, the public funding of retirement was, at its inception, a modest and fairly limited undertaking/

In the U.S., the Great Depression exacerbated social angst about requiring individuals to bear sole responsibility for their financial well-being throughout their lives. As a response to these concerns, the U.S. government established the Social Security system (along with national unemployment insurance) in the mid-1930s. Here again, however, the initial financial commitment for such social insurance was relatively modest. Life expectancy for a male entering the workforce at age 20 at the time was only modestly higher than it had been in the 1880s – around 65 – and so similar economic assumptions held. Approximately half of the working population was never expected to reach the age at which they could draw on Social Security. And those who did had an additional life expectancy of only about 12 years.

But what a marvelous system this was! For a modest deduction from one’s paycheck – only 1% from personal income (another 1% from one’s employer), an employee in 1940 could be assured of a lifetime pension, guaranteed by the government. No wonder that Social Security is one of the most politically popular programs ever created. And because of that popularity, politicians did what politicians routinely do: they gave away (or at least committed away) more and more of “the government’s” (i.e., taxpayers’) money. So in addition to the original retirement funding, lots of other goodies were added to Social Security over the next several decades: disability payments, payments for dependent children, spousal benefits, early-retirement benefits, inflation adjustments – and all of this is before we’ve taken Medicare into account.

All of these increased benefits did, in fact, gradually push up Social Security tax rates, as follows (some data points omitted):

Year Social Security Tax Rate
1937 2%
1950 3%
1959 5%
1960 6%
1966 7.7%
1969 8.4%
1971 8.4%
1978 9.2%
1987 11.4%
1990 12.4%

In spite of the increasing cost, however, the system was still an incredibly good deal for its initial participants because it is a transfer-payment system and not a savings program. (It is, in fact, somewhat like a Ponzi scheme in this regard.) If you started paying Social Security taxes in 1960 it cost you 3% of your take-home pay. By the time you retired in 2000, current workers were supporting you at a rate of 6.2% – more than double your initial contribution rate. Indeed, for most of the 20th Century, Social Security provided participants with far greater returns than they had actually paid for, and not only because of increasing Social Security tax rates. Social Security in the latter half of the 20th Century enjoyed an unprecedented demographic windfall as the Baby Boom generation joined the work force en masse (including a vast increase in the number of women working for wages) and all helped pay for the rich benefits that had been extended to the previous generation.

Today, however, with the Baby Boom generation beginning to retire, this trend is reversing itself. There are now three workers for every Social Security beneficiary in the U.S. – compared with 39:1 in the 1930s and 16:1 in 1950. By the time the last of the Baby Boom generation retires, the ratio will be 2:1. And without a dramatic increase in Social Security tax rates – or an adjustment to benefits – the system is projected to be able to fund only 70%-75% of promised benefits by mid-century.

In short, the free lunch is over.

Toward A More Balanced View Of Life

Let me try to summarize a couple hundred years of socio-financial change:

  • For most of human history, people’s work and social roles were co-determined and pre-ordained. One worked in a role prescribed by society and received whatever rewards were dictated by tradition. One didn’t have choice and one didn’t receive market wages. For all but the elite, life was, as Hobbes put it, “solitary, poor, nasty, brutish, and short.”
  • The industrial revolution brought increased choice as to one’s work as well as dramatic opportunities for personal financial gain. It also caused great social dislocation and, with it, a weakening of the traditional ties that had helped many individuals get through difficult economic times. The potential for financial success was great, but so was the risk of calamity.
  • In the late 19th Century, industrialized nations began to adopt systems that enabled at least some of the risks (and costs) associated with old age and work dislocation to be absorbed by the community. Individuals were protected from the extremes of hardship and dislocation, while the cost to society as a whole was relatively modest.
  • In the 20th Century, these same industrialized nations spent financial windfalls from increasing tax rates, population growth, and workforce participation growth to increase the benefits promised by social insurance systems far beyond (1) the scope of their original intent, and (2) the level at which they will be sustainable for the next 100 years.

As a society, we are now faced with both the need and the opportunity to re-think and re-work the balance among all these forces. Those of a “socialist” persuasion would like nothing better than to return to a system of pre-ordained work accompanied by non-market-based pay (with themselves clearly cast in the role of the “elites” who tell everybody else what to do). At the other political extreme, there are those who advocate scrapping social insurance altogether and falling back on an individual-based, winner-take-all system of risk and reward. Personally, I think that history and logic both argue against both of these extremes. If we can get the balance right, each and every member of society stands to gain tremendously from the exercise of personal freedom and unconstrained participation in labor markets. At the same time, none of us need bear all of the risk that such participation entails in its unmitigated form. We learned centuries ago that risk-sharing works and, if done responsibly, can be both cost-effective and fair.

Taking A Step Back

For two centuries now, as these sweeping changes have taken hold, people have responded to them in a marginal, piecemeal fashion. At crucial points along the way, both individuals and political entities have taken steps to stem impending crises – or have taken advantage of a financial windfall – but I don’t think that anybody has truly stepped back to ask the question: “How should we approach life, work, and money at a time in human history when we can routinely expect to live 95 or 100 years (or more!)? Consider further:

  • Is it appropriate to assume that we should be economically productive for only approximately 40% of our lives (ages 25 – 65)?
  • Is it appropriate (or financially feasble) to promise people the right to a guaranteed, and growing, income lasting 35 – 45 years based on only 30 years of their work?
  • What is a sustainable balance between individual responsibility and a social safety net?
  • Perhaps most importantly, how would our thinking about work itself change if we didn’t assume that we should stop being economically productive at mid-life?

Don’t Wait For The Government To Take Action

The political tussle about what to do about all of this is clearly going to go on for some time. I have no idea how it is going to turn out, but I do believe that each of us, as individuals, can benefit by fundamentally re-examining how we think about creating, accumulating, and using wealth throughout our own lives. The key, I believe, is to think in terms of responsible and sustainable life funding. I hope that each of us will continue to get some help from “the government”, but since the government is nothing more than “us” in the aggregate, it doesn’t seem feasible to me for the majority of individuals (as opposed to a minority of the truly disadvantaged) to count on somebody else to do the heavy lifting for them.

To assist you in your own examination, I offer the following thoughts for your consideration:

  1. You’re probably going to live longer than you ever imagined you would. That’s good news for you personally, but it has the potential to mess with your numbers. I’m always perplexed when clients tell me they’re gong to check out at age 76, “because my Dad died at that age.” But you’re not your Dad, and we’re on the brink of new and life-extending medical breakthroughs. Of course, you could get hit by a truck, but that possibility seems to me to be an odd planning strategy. Yes, you really do need to think in terms of reaching 95 or even 100. (Now see #2 below.)
  2. You are probably materially underestimating the lifetime cost of your lifestyle. Most of us think we can afford our current lifestyle if we get to the end of the month about the same time we get to the end of our paycheck. This is an illusion. If you wish to spend half of your adult years not earning money (i.e., ages 60 – 100), then you need to start thinking in terms of pre-paying your expenses for one non-earning year at the same time you pay for each earning one. The bottom line is simply this: you’re probably going to need to save more than you ever imagined you would need to. And the first step in being able to do this is the realization that a significant portion of your current cash flow only seems to be available for current consumption. Stop thinking like this. It isn’t really there; your future self has already spent it.
  3. Regardless of your income category, you’re going to get less help from formal pension systems (government or private) than you thought you would. Forewarned is forearmed. It’s just math – it isn’t about what you’ve been promised or what is right (depending on your point of view). Any way you measure it, politicians (and others) have simply promised more than it will be possible to pay out. There are limits, and we’re beginning to bump into them. You may get lucky and avoid cuts (or lowered COLAs) to your pension plan, but I wouldn’t bet the farm on it.
  4. Consider not thinking about your life in terms of “working” until your early- to mid-60s and then “retiring” to do… nothing or what? This worked when average life spans were 60-65 and  most work consisted of hard, physical labor. It probably isn’t a sustainable practice in our society any more. Most of us are capable of doing something useful well beyond our early 60s. This is especially true in a world in which intellectual work is valuable and the internet allows us to “go anywhere”to do that work. Stopping all productive work mid-life either forces us to accept a lower lifetime living standard (see #1 and #2 above) or places too great a burden on the next generation to fund our lack of foresight. For all but the truly disadvantaged or disabled, this is probably no longer a socially responsible choice.Instead, start thinking about a phased approach to economic productivity over a much longer period of your available life span. The notion that one works in a single job, company, or industry “until retirement” and then quits cold turkey is, well, oh so 19th Century. The alternative, which entails doing different, age-and-experience-appropriate work at different times in our lives requires thought and preparation and – frequently – some creativity. But it can be done. And if you do it well it could mean not only a much happier life but also a much more financially stable and socially productive one as well.
  5. Tax-efficient management of your financial affairs is more important than ever. The more you earn, the more likely you are to be the target of future tax increases. But let’s face it: the kind of social costs we have (over)committed to in the developed world could not be paid by taking every cent of income that everybody in the “1%” earns. That would still not be enough. So there will be enormous pressure to raise taxes on everybody, not just on “the rich”, until most people, in turn, decide that it would be a better deal simply to keep more of what they earn in the first place. In the meanwhile, however, you should diligently and consistently make use of any and all tax-advantaged savings strategies that are available to you.
  6. If you are young enough to be a Gen-Xer or a Millennial, be advised: you are going to bear a disproportionate share of the cost of your parents’ retirement lifestyle. For one thing, there will be obscene political pressure to increase your payroll taxes in order to more fully fund the Boomers’ Social Security benefits. For all earners, this could mean higher tax rates. For higher earners, it is very likely to include removing the current cap on Social Security earnings without increasing your Social Security benefits. Unfortunately, this is social funding Whak-a-Mole, because the more of your pay you need to spend on your parents, the less you will have to save for your own later years. In other words, this cost-shifting between generations doesn’t really address the issue of long-term social sustainability we face. When the music stops, somebody is going to be stuck with a lower standard of living in order to pay for somebody else. My guess is that it’s your generation that is going to get stuck without a chair.
  7. If you’re a Boomer and care about your Gen-X or Millennial kids, there are several things you can do to mitigate the financial strains they’re going to have to deal with. (See #6 above.)The first thing I suggest you do is to demand that they become financially self-sufficient as quickly as possible. This is more than tough love; it is a survival strategy. Your kids need to internalize what it takes to afford the lifestyle that you have introduced them too. If they want it, they’re going to have to work for it, because you probably won’t have enough left over to fund them in addition to yourselves. (You’re going to live longer and spend more than expected, remember?)If you are in a position to help them financially, however, I strongly suggest that you help your kids save and not spend, precisely because saving is going to be really difficult for their generation. Offer to match an IRA contribution. Help fund their HSA accounts. Contribute to their children’s 529 plans. If you still have available resources, you can even fund a low-load, low-cost annuity for them that will augment their own long-term savings in a tax-efficient manner.Finally, if you are close by and so inclined, you can help your grown children with child care in some way. It can save them lots of money, provide you with a wonderful and fulfilling activity, and potentially enable your children to enhance their careers. Oh, and by the way, it is already a cultural norm in many parts of the world.
  8. Lastly, remember that money is only one of the many resources you have as you think about the long arc of your life. Friends and community are a resources (to which you need to give as well as receive). Family is a resource. Your health is probably the most important single resource you have. Your marital relationship is a resource. You can invest in and receive a return from all of these – and the good news is that you typically aren’t taxed for doing so.So when you’re considering that job that pays 10% more but is totally stressful (bad for your health) and makes your spouse and family unhappy (bad for your spousal and family relationships), stop to think that those represent real costs in your life. You may still want the job, but you should fully consider the costs involved. Most of us discount these costs because they can be difficult to quantify, but if you start paying attention to them you’ll see that they are very real and can be very significant. For example, we know that divorce is financially devastating. Children with behavioral or substance-abuse issues can create a terrible emotional as well as a financial strain. And even with subsidized health care available, the personal and financial cost of poor health makes a huge difference in one’s well being. The bottom line is this: preparing for a long and happy life means more than saving money. It also means making time for your friends and family, being good parents to your kids, and getting your but up off the couch to do some exercise.

Now remember that you are among the most fortunate generations in the history of mankind. Be prepared. And enjoy!

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