THE FUTURE OF RETIREMENT IT'S NOT WHAT YOU THINK THROW OUT ANY PRECONCEIVED NOTIONS THAT YOU MAY HAVE ABOUT HOW YOU'LL RETIRE: A RADICAL NEW PARADIGM IS EMERGING THAT WILL CHANGE HOW YOU INVEST, DREAM, AND PLAN FOR THE FUTURE.
(FORTUNE Magazine) – This special section is devoted to retirement issues: what you'll need, how to invest wisely, where to live, and who's doing retirement the right way.
There's been a lot of talk lately--on TV, in the press, from Washington--about how the nature of retirement will change for baby-boomers. For example, this year, as the very first of the boomers turn 50, the future of the Social Security system has never looked so grim; it will be paying out more than it brings in by the year 2013 and will run out of money altogether by 2030. The good old-fashioned pension, the kind that you could count on come hell or high water, is going the way of rotary phones. (Even if your company still offers one, you may not stay long enough to reap much of the windfall.) And savings? You've probably already been blown away by the stats: By the time a boomer couple making $200,000 retire, they will have had to save more than $1.5 million just to ensure a comfortable income through their 80s. And that's accounting for the 30% reduction in spending that's considered practical. The numbers alone are grim enough to make you want to run and hide.
And yet, if we were able to jump ahead a few decades and look back at such discussions, we would see that they resemble the unfocused buzz that occurs just before a stock market crash: In hindsight, all the interrelated signs of a massive shift coming were there--but no one was able to weave them together. Similarly, examining each piece in the puzzle of retirement's future separately doesn't add up to the more significant reality at hand: Nothing less than a paradigm shift is under way, which will completely affect how you save and invest, how you fantasize about and plan for the future.
With this sea change, we won't be able to assume that any of the perks from our parents' retirement will carry over. The financial pillars of generous federal aid and fat pensions can't be counted on. The boomer generation and the generation beyond will live longer and, for the most part, more vigorously--so there will be more years to cover financially. Thanks to improved health, we will be physically capable of working longer--but we'll also need to work longer for the added income. We'll have to scale back--how much will depend on how thrifty and clever we are today--and question every financial assumption we make.
In the future, retirement will create the great dividing line for boomers, separating them once and for all into the haves and the have-nots. "There will be a shakeup," says Cheryl Russell, author and editor of The Boomer Report, a newsletter. "A lot of boomers who are now the equal of their peers will find themselves either falling way ahead or falling way behind." Those who understand the vast changes at hand and plan accordingly will be the haves.
Wherever you stand, the new retirement won't necessarily mean an economic free fall in the post-Social Security age. It will, however, require more forethought than most of us have hitherto managed. With government aid fading from view, our own financial planning efforts will play an enormous part in determining the quality of our later years. In a study compiled for Merrill Lynch, Stanford University professor Douglas Bernheim calculated that boomers ought to be saving on average three times as much as they are in order to avoid a precipitous standard-of-living decline. Instead, they are avoiding the subject. When Putnam Investments, the Boston-based money management firm, surveyed baby-boomers last year, 54% of them said they couldn't even imagine what their retirements would look like.
It's enough to sober up even the optimists. "There is still time to wake up, but the baby-boomers are largely asleep at the wheel," says Ken Dychtwald, who has written eight books on aging and is founder of Age Wave, a research and consulting firm. "If you don't pay down debt, get your money compounding tax-free, build up a nest egg, and acknowledge that Social Security as it exists is more than likely to be obsolete, then there's danger ahead." Watson Wyatt Co., the benefits consulting firm, put it more succinctly: "The wisest approach is to expect the worst, save until it hurts, and be pleasantly surprised if things turn out to be better than expected."
A model exists--under our noses, in fact--that helps to explain the scope of the new retirement paradigm; it is our past. This is not, after all, the first time in history that Americans have had to worry about retirement. Rather, modern history shows that every generation has had to work longer and fret more about money than today's retirees. The fact that our parents have basically been able to take the last chapter of their lives off, paid, is a freak occurrence, a confluence of benefits that we're not likely to see again.
In the early years of this country, retirement worked pretty well on the family farm. Fathers could ease out of working gradually, passing on responsibilities to their sons. Children acted as a couple's old-age insurance; the more they had, the better the odds that somebody would be there to care for them, according to Dr. Richard Sutch, an economic historian at the University of California, Berkeley, and several colleagues who have studied the matter for the National Institute on Aging.
With industrialization in the late 19th century came a retirement that was a lot less graceful. New factory jobs were repetitive and taxing, and workers began looking forward to retirement. They saved for it. And when they quit, sometimes as early as their late 40s, some would convert their savings into some kind of entrepreneurial venture, according to Sutch, that would allow them to work fewer hours as they slowed down. They would become shopkeepers, carpenters, market gardeners. Although the new jobs brought in less pay than the old industry jobs, they helped put food on the table. With its similarities to our current predicament, it is a model, Sutch says, that may help us out in the future.
It has only been in recent decades that people have given up the notion that they might have to work into old age. It was actually a mixture of corporate expediency and economic good luck that led to our modern concept of retirement. The advent of corporate pensions with their mandatory retirement provisions at the beginning of this century, and then the introduction of the Social Security system in 1935, not only validated retirement but encouraged it. The healthy post-World War II economy handed our parents further benefits, such as expanded Social Security and ever-improving pensions. That group also got in on the ground floor of a real estate boom, and saw breathtaking increases in both real incomes and the stock market. Some continued to work--many because they chose to.
These Organization Men, like the farmers long before them, also accumulated children--prodigiously. About 76 million babies were born in America between 1946 and 1964, a phenomenon that would have the most massive effect on our retirement--a bottleneck in benefits of gargantuan proportions. By the year 2030, some 20% of the population will be over 65, compared with 12.6% in 1990.
In contrast, boomers haven't experienced the same run-up in housing values and may even, some predict, suffer losses if they decide en masse to sell their houses in order to downsize. They have seen neither the increase in real incomes their parents enjoyed, nor the corporate stability and generosity. And while baby-boomers have had fewer children, they've come later in life, so many parents will be paying college tuition bills when they should be socking away retirement savings. While some studies show that baby-boomers aren't saving all that much less than their parents did at the same age, that's hardly the point, since they aren't likely to have nearly the same good fortune. "Their parents didn't save enough either, but they got bailed out--by the expansion in the private retirement system, and by inflation in the Seventies and Eighties, which wiped out their mortgages," says Bernheim. "They were very lucky."
Boomers, however, will be lucky in a different way: Our life expectancy has continued to increase beyond what anybody had a right to imagine--from 68.2 years in 1950 to 75.8 years in 1992, according to Kenneth Manton, a demographer at Duke University. In the next two to three decades, average life expectancy could rise to 83 years for women and 77 years for men. "And that's on the conservative side," Manton says.
This is, to be sure, good news. Life has not only been extended but, in many ways, enhanced. In research that stunned the ger-ontology community last year, Manton found that chronic disability among the elderly declined significantly in the 1980s. With hip transplants, artificial knees, corneal laser surgery, and modern medicine's other miracles, older people can solve many health problems by making themselves practically bionic these days. Moreover, an armament of new medical technology has made great advances against some of aging's killer plagues. From 1950 to 1992, the rate of mortality from heart disease fell 53%; the mortality rate from strokes fell 70%.
There is even reason to believe that tomorrow's retirees may be more agile mentally. Studies suggest that the more people use their brains, the less susceptible they are to losing mental acuity. They've also learned about the benefits of diet and exercise and the dangers of alcohol and smoking, and as a result they're taking better care of themselves than previous generations. "If you put in the effort and do the preventive maintenance, you can go a lot longer and be a lot more functional," Manton says. The passion so many baby-boomers have for fitness should be a real boon in later years; in fact, it may be part of their own old-age insurance.
There is a darker side to longevity, however: The business of living all those extra years costs a lot. If you want to retire at age 65 and live off your savings, even if you keep to the accepted average of a 30% reduction in your standard of living, the cost of each extra year of life gets mind-boggling. Assuming a 50% cut in their Social Security benefits (which some experts feel is conservative), for a two-career couple making a pretax total of $200,000, the first year of retirement will cost $84,000 in today's dollars, according to Merrill Lynch, and will go up from there. If they are able to save $1 million and have no health catastrophes, their nest egg will last only until they're both 78 years old.
Because saving at that level may not be possible for most people, many baby-boomers are now resigned to keep on working. For the most part, they are not vexed by that. More than most other previous generations, boomers identify closely with work. While their parents were great at compartmentalizing work and play, with leisure the reward for work, boomers let their work bleed into everything they do.
But how will employers meet boomers' demand to work longer? And will they even want to? A now-longstanding belief built into most businesses is the idea of planned obsolescence of aging workers, first by way of mandatory retirement, and then by way of pension inducements that encourage workers to leave at a particular age. But as the economic outlook for future retirees gets ever murkier, practically every expert on aging questions whether, as people live longer and stay healthier, companies can't be more flexible in the way they allow employees to retire. Instead of laying off 50 people, why not let 100 work part-time? Why can't companies reorganize to allow older workers to phase out gradually, taking jobs that are more flexible and less demanding along the way? Why shouldn't productive older employees be encouraged to work longer? "Most firms are still pretty unimaginative about this," says F. Thomas Juster, economics professor at the University of Michigan.
One fact might help change corporate America's mind on the issue of aging: How well an employee keeps up can have a lot to do with the nature of his or her work. The ability to process and act on information slows as one gets older, which has implications in some careers more than in others. In the case of an airline pilot, for instance, "there is an issue of neurological reaction time vs. judgment time: How fast does a nerve impulse propagate through the arm of a 25-year-old vs. the arm of a 65-year-old?" says Duke's Manton. But on the other hand, he says, "we all know that 70-year-old lawyers can be pretty good."
Still, don't expect to keep the money machine going at the same rate. Charles Brown, an economics professor at the University of Michigan, studied a group of men, ages 53 to 63, who went back to work after accepting early retirement packages. He found that they had taken a 40% pay cut--surprisingly steep, he says, considering they were predominantly skilled white-collar workers.
Brown thinks the culprit is the typical merit grid: the seniority-based salary increases that are so big a part of the way workers are rewarded. After 30 years, Brown says, "your current salary reflects the history of how well you've done, not the quality of work you're currently doing. I don't mean to say that older workers aren't as productive or more productive than the guy 30 years their junior. It's that the margin by which that's true doesn't have much to do with the margin by which their salaries are higher." At some point, he says, it might "pay both sides to think about whether there is some way of restructuring the bargain."
It might be easier to turn an aircraft carrier on a dime. The proactive boomers may take the initiative and push companies to change--much the same way they did over issues such as maternity leave. But it would be vastly difficult for companies to rethink how they pay older employees without running into age discrimination issues. Moreover, "the hardest thing in the world would be to impose some sort of occupational downgrading, given how much people have invested in that climb up the corporate ladder," says Sutch, the economic historian. What is easier to envision, he says, is many of us using our savings to create late-life employment opportunities, much as people did 100 years ago. "Already we are seeing that," he says. Just as older executives become consultants as they ease into retirement, so might a lot of baby-boomer professionals do the same, becoming free agents marketing their own services on a project-by-project basis. Or they might launch their own businesses or become entrepreneurs, converting hobbies into second careers. In California's Napa Valley, where Sutch vacationed recently, he was surrounded by retired professionals who now tend to their vineyards. "Converting a hobby into self-employment may be a lot easier than trying to force IBM and Ford to hire all these elderly," he says.
But preparation for that kind of retirement has to begin now. The old, traditional three-legged stool--Social Security, company retirement plans, and personal savings--"worked very well for our parents," says Paul Gewirtz, a partner with Ernst & Young, but for baby-boomers "it is not going to cut it." He and innovative financial planners are doing somersaults to figure out how to get baby-boomers and the companies that employ them not only to begin facing the issue but to look at it in different terms. Gewirtz is working on a software model that will devise saving and funding strategies by looking at an employee's investments--account yields, tax implications, age penalties--and factoring in what he or she would like to use the money for, such as, say, a sabbatical, time out for child rearing, or a period of part-time work later in life. The idea is to save boomers from having the upcoming decades be a series of unpleasant surprises.
Cigna Corp., too, is revamping its products to help us start predicting the implications of each big event in our lives, be it going back to school, changing jobs, or launching a new business. Robert J. Cohen, a financial counselor in Berkeley, says he tries to get his clients to segregate pools of money. "I try to get people to think about a flexibility pot, which is money they'll want to use in a few years to start a new business or go back to school."
He and others advocate that baby-boomers make their best guesses--start somewhere--and adjust as they go. Will you want to stay with one employer your entire life, or does that prospect make your palms sweat? If you want to switch jobs, know the pension hit you'll take (your benefits department can quantify it for you) and have some plan to make up for it. If a couple know they'll want to take time off along the way--to start a family, write a novel, or travel--figure that into the equation. Above all, stay flexible. "There are very harsh realities--it may mean lending your kids the money for college," Gewirtz says. "If you're lucky enough, you can cancel the loan later."
Throw out, too, all the old notions of what it means to "act your age." Due to what Charles Schewe, a marketing professor at the University of Massachusetts, Amherst, calls the "cohort effects," we will hang on to many of the values and passions that defined our youth. We will continue to wear jeans; we will continue to listen to the Grateful Dead. (Who cares what our kids think; as the biggest generation ever, we will still be trendsetters.)
And just possibly, born out of some combination of desperation and resiliency, we will come up with a whole new prototype for a happy, productive retirement. As has been true of prior generations, many of us are likely to want in retirement what we can't have now: balance. We will want what aging experts are now beginning to call a blended life course--an ongoing mix of work, leisure, and education. We are work junkies, personal development junkies, information junkies. We will keep up our passion for travel. "We are addicted to adrenaline. We like physical action and intellectual action. We will want to be near movie theaters, bookstores, concert halls--so we can catch the Rolling Stones when they come through. You won't find this in the middle of Palm Desert," says Ken Dychtwald, speaking of the California community that many people now retire to.
Of course, try as we might, we can't have it all--a fact boomers must look in the eye. Some marketers are beginning to see that our retirement may be a perverse twist on the 1980s, when we could be counted on to splurge on everything from Grey Poupon to BMWs. In truth, the boomer generation dramatically delayed the more capital-intensive stages of marriage and childbearing, giving the illusion that there was plenty of money for life's little extravagances, if not its big ones. We got spoiled then. We got hooked on eating out, nice clothes, and living beyond our means, which is partly why we are having so much trouble saving enough.
Our tastes haven't changed, but our circumstances have. We've already had to moderate our extravagance. We've had fewer children. We've put our spouses to work, giving up not only leisure but time for family. We're likely to be doing more scrimping in the future. We will still travel, but it may be no-frills, back-of-the-airplane trips that for us will be the equivalent of a senior Greyhound tour. Instead of taking several months in East Asia, we may do four days in the Caribbean. Instead of splitting time between homes in New York City and Florida, we'll do budget-minded home swaps--say, Chicago to Paris--in a new twist on the time-share. Barbara Caplan, a partner at Yankelovich Partners, believes retired boomers will engage in "yo-yo spending," much the same way we did "yo-yo dieting," saving up, say, for a new car or a face-lift but scrimping on everything else.
Or it may be the reverse: Many of us may no longer be able to afford a BMW, but we won't have to give up our Starbucks for Maxwell House, either. As it has been through much of our adult years, it will be the little luxuries--not the big ones--that make us look and feel as if we are a lot better off than we really are.
In fact, downscaling may get to be really fashionable. If any generation is capable of starting such a trend, it's ours. Consider what boomers have done for casual dress, making the Gap and Banana Republic household names. Then fast-forward 25 years: "Baby-boomers rationalize where they are, what their role is, and where they fit into it--and they always come out smelling like a rose," says Frank Conaway, a marketing consultant. "Whatever they do, it is going to be cool. It may be that we're all going down the tubes, but if we are, then it will be cool to be going down the tubes."
And, who knows, we may end up with a new model of retirement that future generations might actually aspire to. We might finally do that downscaling we've always talked about. Our next career might just possibly turn out to be a labor of love. And we might get to a point where, instead of time being more valuable than money, money just might at last be more valuable than time. That may not be quite the same as the worry-free, pension-rich golden years that our parents had. But it would indeed be something to look forward to--something to plan for.
REPORTER ASSOCIATE Erin M. Davies