How the World Retires

BY CHIP CASTILLE

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.

In Their Own Words

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

Monterrey, Mexico

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

Santiago, Chile