In the past, most people simply worked until they died, with little time for leisure in their later years. In the year 1870, for those who lived past age 65, the labor force participation ratio for males was close to 90%.
The concept of retirement is relatively modern. Most people just worked throughout their lives, until they could not or until they died. Even well into the nineteenth century, almost half of 80-year-old men in our country were still working, says Fortune in the article “You Might Have Longer Than You Think to Invest for Retirement.”
There’s no need to plan for your “golden years,” when life expectancy is short. In 1800, about half of all babies born didn’t survive past childhood. Life expectancy was short—30 years—and no country had a life expectancy past 40. Today, the average life expectancy is 72. The average American retires at age 62, while a century ago, the average American was dead by age 51.
What does this information tell us about our retirement plans?
People close to retirement worry about stock market crashes and recessions, which are definitely scary to live through. The biggest risk is running out of money. Portfolio management in retirement requires a balance of short-term stability and long-term growth. Very few of us have the ability to live on the interest in our portfolio, especially in today’s low interest rate environment. Even a 2% inflation rate would easily cut our purchasing power over the years, if you kept assets in cash, or under a mattress. There is a need to take some risk and accept some volatility, even as you near or are in retirement.
There’s a bit of chatter that Boomers are going to crash the markets or deplete Social Security as they age. It is not likely. For one thing, Boomers are notoriously underprepared for retirement. That means many will have to keep some portion of their retirement funds in the market to make up for their lack of savings.
It’s also estimated that the top 10% of American households by wealth, now hold nearly 85% of stocks in the U.S. Regardless of how you feel about that, expect that most of the money will be transferred to the next generation, rather than cashed out. Let’s not forget those millennials, who now outnumber Boomers. As they hit their peak earnings levels in the coming years, it is likely that they will turn to stock markets for their increasing assets.
There are two solutions to make your money go further during retirement. You’re living longer, so save early and save often. Don’t wait until you hit 45 or 50 to start putting away money for retirement. Consider delaying retirement from 62 to 70, which allows your money to compound longer, lets you avoid drawing down your accounts and maximizes your Social Security benefit.
Finally, here’s something that many people forget—once you do retire, your investments are still working for you, unless you cash out every single account you have upon retirement, which is unlikely.
Reference: Fortune (July 20, 1029) “You Might Have Longer Than You Think to Invest for Retirement”
