Retirement Planning for the Very Long-term

cookie jar My Comments: You have perhaps heard the expression that “… it’s like watching grass grow.” Or perhaps “… it’s like watching paint dry.” I use it when something I’m supposed to be paying attention to is progressing slooooooowly.

It comes to mind in the constext of this article which has demographic overtones. Personally, I’m on the leading edge of the baby boom generation, that group of people born shortly after the end of WWII who are now reaching their late 60’s.

It came to mind recently with an article about how the economy is improving, but very slooooooowly. My conclusion was that if I’m any example, my wife and I simply don’t spend as much money as we used to. Dropping 20 bucks on something trivial seems foolish and unnecessary. So we don’t. I’ll wager there are a lot of us now, and soon to be more.

Clients of my generation, or soon to be, are increasingly worried about running out of money before they die. So I help them find ways to help make sure that doesn’t happen. It’s a fine line at best. What if you find yourself dying at age 75 with enough money in the bank to realize you could have had an apartment in London or Paris for the summer months every year?

By Robert Powell, MarketWatch

The world’s population is aging, rapidly. So much so in fact that roughly one in six people is expected to be 65 and older by 2050, double the proportion today, according to a recent Pew Research Center report. Put another way, the global population of people ages 65 and older is expected to triple from 530.5 million in 2010 to 1.5 billion by midcentury.

And all that aging is, well, likely to affect your, and more likely, your children’s retirement plan.

How so?

Social Security and Medicare

First off, Social Security and Medicare are likely to change dramatically in the coming four decades.

Consider: Public expenditures around the world on pensions and health care — driven largely by aging — are generally projected to increase as a share of gross domestic product (GDP), according to Pew. Read Attitudes about Aging: A Global Perspective.

The good news for U.S citizens, at least, is that pension expenditures are predicted to represent a lower percent of GDP than in other parts of the world. For instance, public pension expenditures are expected to consume about 15% of GDP by 2050 in several European countries, according to Pew. By contrast, U.S. pension expenditures are projected to rise from 6.8% of GDP in 2010 to 8.5% in 2050.

Meanwhile, public health-care expenditures as a percent of GDP are rising even faster than pension expenditures in most countries, according to Pew. In the U.S., public-health expenditures — due in part to the graying of the population as well as cost inflation — are projected to more than double, from 6.7% of GDP in 2010 to 14.9% in 2050.

And all that spells change. “Our Social Security and Medicare systems are not sustainable under current law, and thus we have no choice but to eventually reduce the level of promised benefits or increase taxes,” said Jeff Brown, a professor at the University of Illinois. “But we are still at a point where, if we act soon, we can make these changes without fundamentally threatening retirement security or economic growth. Of course, if we continue to kick the can down the road, then the choices will become much more stark in the years ahead.”

Now, in response to public-pension expenditures representing a larger and larger percent of GDP over time, Pew reports that many countries have or plan to implement reforms, such as increasing the retirement age, as way to stem the rate.

The good news for U.S. citizens — born and not yet born — is that the expected rise in pension expenditures is lower among the developed economies because they are currently aging at a less rapid pace than other countries and because many have implemented reforms that are expected to limit the growth in pension expenditures, Pew wrote.

In the U.S., for example, the original Social Security full retirement age of 65 has been gradually on the rise since 1983, Pew noted. It is scheduled to level off at 67 for people born after 1959. Brown said it’s worth looking at increasing Social Security’s full retirement age above 67, but it can’t be done without a great deal of thought. “We may also want to consider gradually raising the early entitlement age for Social Security, although this is tricky to do because some occupations, for example, firefighters, may still have good reason to retire early,” said Brown.

To be sure, it’s hard to predict whether lawmakers in the U.S. will ever increase Social Security’s full retirement age above 67. But one should at least consider that in their retirement plan.

Other experts, meanwhile, note that public expenditures on pensions and health care rising as a percent of GDP isn’t always a bad thing. “Pension and health care spending will increase but don’t confuse budget issues of one segment of the economy with an economic issue,” said Teresa Ghilarducci, a professor at The New School’s New School for Social Research. “Government expenditure is another sector’s income — spending equals income — and the aging economy in the U.S. will be the source of new jobs and innovation.”

Working longer, living longer

No matter whether lawmakers increase this nation’s full retirement age, current and future citizens of the U.S. will have to contemplate working longer and living longer.

Two issues are at play. One is longevity and the other is the old-age dependency ratio.

The average U.S. resident born between 2010 and 2015 could expect to live for 79 years. By contrast, the average U.S. resident born between 1950 and 1955 could expect to live to 69 years. Meanwhile, the total dependency ratio in the U.S. is expected to rise from 49 dependents per 100 working-age people in 2010 to 66 in 2050, according to Pew.

Brown said these facts call attention to the need for “an attitudinal and cultural shift” away from this idea that people ought to leave the labor force in their early 60s.

“Over the past 50 years, our lives have not only lengthened, they have also gotten healthier,” he said. “In addition, the nature of work has changed, and a smaller proportion of jobs today are as physically demanding as 50 years ago. If we are leading longer and healthier lives, we ought to stay in the labor force for longer.”

And to accomplish this, Brown said government and employers could help by removing barriers to longer working lives. “There are a range of ideas out there on how to do this: everything from removing barriers to part-time work to exempting older workers from paying payroll taxes.

Aging population highlights need to save more

Consider too the notion that you will be bearing an even greater responsibility for your economic well-being when you’re older. To be sure, a good percentage of Americans (46%) already say they — rather than government or their families — bear the greatest responsibility of the economic well-being of the elderly in the U.S., according to Pew.

But even more will have to do so in the future. “We need to continue to encourage people to save and invest,” said Brown. “I would (also) suggest we need to shift the discussion of retirement away from just saving and toward making money last for a lifetime.”

Others, however, say that it might take a village to ensure the economic well-being of the elderly in the U.S. and elsewhere. “We are living longer and, as such, we are living longer with chronic disease,” said Cyndi Hutchins, director of gerontology for Bank of America Merrill Lynch.

According to Hutchins, elder care issues are a major concern, not just for the elderly, but for the boomer generation and generations that follow. That’s because elder care for most will be a shared responsibility. “Each individual will have responsibility for their own care and, as costs escalate, families are likely to share responsibility for the care of parents and grandparents as they age into their 80s, 90s and beyond,” she said. “This responsibility will be financial as well as instrumental, providing hands-on physical support, and emotional.”

Economic slowdown or not

Current and future citizens of the U.S. also need to consider what an aging population could mean for economic growth. In general, there’s concern that a shrinking proportion of working-age people (ages 15 to 64) in the population may lead to an economic slowdown.

But according to Pew, that might not happen here in the U.S. “Although the U.S. population is anticipated to turn older and grow at a slower rate in the future, it is projected to increase at a faster pace and age less than the populations of most of the rest of the developed world,” Pew noted. “Thus, to the extent that demography is destiny, the U.S. may be in a position to experience a more robust economic future in comparison with other developed nations.”

By the way, part of that economic future will include building and/or adapting infrastructures in the U.S. to its aging population. “Just as we built schools and sprawling suburbs to accommodate the needs of a generation of children in the 1950s and ‘60s, we now need to adapt to meet the rising needs of an older population,” said Hutchins. “The numbers of ‘elder communities’ will increase and move into suburban areas, and services for this population — such as age-friendly transportation systems and medical facilities — will need to follow.”

Still, Pew noted that smaller working-age populations must support growing numbers of older dependents and that could create financial stress for social insurance systems and dim the economic outlook for the elderly.

Future looks bright for U.S. citizens

In the main, however, the future doesn’t look as bleak for U.S. citizens as some might fear. “There is a critical difference between the aging of the population and the aging of an individual,” said Michael Hurd, the director of the RAND Center for the Study of Aging. “Individuals should not be overly worried if the population ages because of low fertility provided they have saved adequately, whereas society needs to be worried about an aging population because of the supply of workers and of financing transfer programs.”

In fact, it’s his take that “individuals in the U.S. population are mostly well prepared which is reflected in their generally optimistic attitude.” In the Pew study, Americans are fairly confident about their ability to maintain an adequate standard of living in their old age. Some 63% are either very confident or somewhat confident regarding the adequacy of their living standards in old age, according to Pew.

And for the record, the U.S. is not nearly as bad off as other countries when it comes to the aging of its population. “Japan’s aging problem is far worse than ours, and Germany’s birthrates are so low that their population will decline absent immigration,” said Brown. “China’s one-child policy is going to be the cause of serious long-term problems if they fund their pensions on a pay-as-you-go basis. This is not to say that problems in the U.S. are not severe, it is just that things here are not nearly as bad as many other nations.”