The idea that in one’s sixties it might be time to step out of work and retire into a life of leisure is relatively recent. But with more people living longer, expectations of retirement are being reshaped.
Brian Loughans’ ninth decade has not been spent sitting on the sofa, slippers on, catching up on daytime TV. This former RAF pilot, air traffic controller and taxi driver has spent his eighty second year delivering Indian takeaways to the good people of West Yorkshire.1
Brian is not alone. He joins the ranks of people around the world working in later life, like Masako Wakamiya, the 82-year old who began her working life in Japan using an abacus but is now an Apple app developer. Having acquired her first computer at the age of 60, she has gone on to create artwork in Excel,2 and built a diverse portfolio of work to inspire silver surfers.
“As you age, you lose many things: your husband, your job, your hair, your eyesight… The minuses are quite numerous,” she said. “But when you learn something new, whether it be programming or the piano, it is a plus, it's motivating.”
The reality of living longer
We shouldn’t be surprised at such stories. Recently, life expectancy has increased by around one year every five years,3 and the number of older people in employment continues to grow.
More years were added to human life expectancy in the 20th century than were added accross all prior millennia of human evolution combined.
“More years were added to human life expectancy in the 20th century than were added across all prior millennia of human evolution combined,” says Professor Laura Carstensen of the Stanford Centre on Longevity, California. “In the blink of an eye, we nearly doubled the length of time that we are living.”
Although longevity now seems to be slowing in some advanced economies, or not advancing in lower-income cohorts, the world will become increasingly grey in the next few decades, as shown in figure 1.
So what does this mean? If a 70-year life equates to around 611,000 hours, a century equates to 873,000 hours. But with the milieu following the financial crisis (low interest rates, lower return expectations),5 many will struggle to save enough by their mid-60s to support themselves for an extended period.
Globalisation and applied technologies have helped suppress inflationary pressures, keeping interest rates low. The exceptional measures taken by central banks after the financial crisis also reduced the cost of capital, sending real long-term interest rates below zero. Rates are yet to recover, continuing to hurt savers more than a decade on.
“Demographic changes are expected to keep rates subdued, as a fall in birth rates and rise in life expectancy has resulted in more savers than spenders,” says Rakesh Girdharlal, head of liability-driven investment at Aviva Investors. “That has a dampening effect on interest rates. As more wealth is accumulated by older investors, they compete for returns, resulting in a lower return on their wealth.”
This is why the savings and consumption habits of older citizens are expected to have profound implications, contributing to a “permanently lower” natural interest rate, according to the Bank of England.6 Significantly, if total returns are low in the accumulation stage of a working life, as many suggest they will be (see figure 2), there will simply be less to go around.7
There are two ways of considering the impact of these trends. Firstly, some people will be forced to work longer as budding retirees struggle to save enough to maintain a satisfactory standard of living if they step out of the workforce early. But, on the flip side, others may embrace additional years of work for health and wellbeing reasons – many retirees struggle to replace the sense of purpose they had during their working lives. For some, elements of both may apply.
more work, or frugality and discipline, look inescapable
What is clear is that more work, or frugality and discipline, look inescapable. Retiring in one’s 60s or earlier might become the exception rather than the norm. Quite simply, retirement as we know it could be over.
“Making the most of the gift of a long life requires everyone to face the truth of working into your 70s or even 80s. Simple as that,” wrote Professor Linda Gratton and Andrew Scott in their best-selling book The 100-Year Life.
On the upside, work might become more varied, with opportunities to develop skills in new areas. Redeploying into lower-paid work with social purpose, becoming an entrepreneur in later life or bridging two quite different occupations won’t be impossible. And less rigid gender roles, with more sharing between income-earning partners, seem likely too.
With more years to fill, education could become as vital for older people as it is for the young. It is unlikely choices made in your teens with training into your 20s will deliver skills for a working lifetime. As technologists believe we are on the cusp of the next industrial revolution,8 the world of work looks ripe for a shake-up. Older workers could take up posts in industries that are only just becoming apparent.
There should be more time for leisure, too. Signs are already emerging of a striking upturn in older people heading to the gym, with facilities springing up to meet the needs of older exercisers. “The cardio machines are typically low impact, the resistance training is mainly air-powered and some group fitness classes are taken sitting down,” according to a Reuters analysis.9 In tailored gyms like Welcyon in the US, the music is carefully selected too – the tunes of the 1940s, 1950s and 1960s inspire the workouts.
Lower- or zero-cost outdoor activities – like cycling or walking – are already popular in retirement, and expected to remain so. Cyclists over 50 are already the most active cohort in terms of distance travelled, while those over 70 spend most hours on the road.10 Perhaps this is a sign of things to come; staying well and active will make all the difference to the quality of a long life.
Those businesses that adapt to population ageing will thrive, while those that keep to the status quo will struggle to survive.
But, as well as having a dampening effect on real interest rates, a shifting population pyramid suggests dynamism in new areas, and different opportunities in which to invest. Healthcare, medical appliances, personal care services, robotics and other technologies supporting independent living, financial services, leisure and property – these are all fields morphing to reflect grey spending power. “Those businesses that adapt to population ageing will thrive, while those that keep to the status quo will struggle to survive,” says Ben Franklin, an economist at the International Longevity Centre UK.11
Note the number of thematic funds already targeting this area, both active and passive; the longevity investment theme is being embraced.
Zero in: more years in the workplace
it is quite startling to realise that one in five Americans over 65 is already in employment
For anyone dreaming of retirement, it is quite startling to realise that one in five Americans over 65 is already in employment, and one in twelve working over the age of 75.12 The same trend can be seen in Japan, the world’s most aged society. This is partly cultural (work is highly regarded) and partly a necessity. The number of over 65s in work has reached a record eight million,13 and the trend does not look set to change any time soon. (See figure 5.)
“In a recent Japanese poll, 78 per cent of men aged 50 to 54 with full-time jobs said they hoped to continue working past retirement,” says Jean-Francois Chambon, Japanese equity fund manager at Aviva Investors. “That figure stayed in the same range for the 55 to 59s, but rose over 82 per cent for those aged 60 to 64.”
However, he points out that many companies re-hire the same employees after they reach retirement age, but typically under less attractive conditions. The re-hired might be shifted to lower status tasks and paid less than before – painful, or liberating, depending on your point of view.
longevity risk is making open-ended pension guarantees increasingly onerous
For those who are not enthusiastic about working on, and looking to the state for an ultimate safety net, it would be advisable not to become complacent about retirement provision: longevity risk is making open-ended pension guarantees increasingly onerous. When the state pension was first introduced in England in 1908, for instance, the eligibility threshold was 70 and average life expectancy was 47.14 Today, the situation has flipped: the threshold is 66 and cohort life expectancy is over 90.15
everyone will need to take greater financial responsibility
“Right across the globe, the idea that the state should guarantee retirement provision is becoming outdated,” says Charlie Jewkes, head of global financial institutions at Aviva Investors. “This is a huge issue, because it will mean that everyone will need to take greater financial responsibility. No-one will be able to get away from that. It’s widely known but largely ignored, because most leaders simply do not work within a time horizon where it’s worth addressing.”
In this environment, auto-enrolment is expected to become more prevalent, introducing the compulsion to save. Ultimately, there may be the impetus for governments to offer means-tested income support rather than a state pension as a universal benefit.16 Other changes could include compulsory long-term care insurance, to address the uncertainties of access to costly social care. This would transfer responsibilies for looking after the elderly and unwell back to the state in later life: it has the advantage of being fair, ensuring equal access, and is another area where Japan has led the way.
The rebalancing of risk in long-term savings schemes is also ripe for change. There may be a shift to hybrid schemes attempting to address longevity risk better, blending features of defined benefit (DB) and defined contribution (DC) schemes. The intention is that defined ambition (DA) schemes would not leave either employers or employees shouldering most risk (as in DB and DC respectively).17
Sociologists see it as moving from a simple three-stage journey (education, work, ‘hard-stop’ retirement) to a multi-stage future.
Facing the reality of a multi-stage life
As the prospect of living longer combines with recent economic and social transformations (automation, flexible working, more contracting, less certainty), some contrasting visions of life are starting to emerge. Sociologists see it as moving from a simple three-stage journey (education, work, ‘hard-stop’ retirement) to a multi-stage future.
People of different ages will be able to explore varied interests, learn new skills, embark on alternative careers or engage in satisfying but unpaid work. Like Brian and Masako, older people may resist the idea of withdrawing from work, but change what they do to reflect their older selves. Blending work and leisure, education, career changes and volunteering… this is a much more complex vision of what life could be about.
For those with skills and focus, it could be very exciting. Participating in varied activities in later life can help defer mental decline and challenge the onset of depression. The prospect of becoming an undergraduate in one’s 40s or even 60s won’t be unthinkable. All being well, there will be plenty of hours in which to master new skills.
planning and building assets for all life stages is really important
But a long life might be a precarious one, particularly as old certainties like a job for life with an index-linked pension will be a rarity. Imagine another reality: working on a zero-hours contract on the minimum wage for years. Sociologist Zygmunt Bauman describes it as a ‘liquid’ life, subject to endless change, beset with anxiety.18
In a mercurial environment, planning and building assets for all life stages is really important. In an ideal scenario, planning starts early, concentrating on growing tangible assets faster than inflation, as well as developing intangible ones such as networks of friends for enjoyment and psychological support. Arguably, these intangibles are just as important as financial assets. Transferrable skills, knowledge, mental and physical health and openness to change will all be needed for a rich later life.
Taking action early will make it possible to transition between life stages more comfortably, and set the foundation for the long term. The International Longevity Centre-UK suggests twenty-somethings should be thinking of saving close to a fifth of their salary, for example, in order to ensure a comfortable old age.19 But given that many people already spend the bulk of what they earn and have limited savings, multi-staging could be stressful. Retirement won’t be a rich gateway for everyone.
Financial planning for a multi-stage life
If current predictions are correct, each individual will have to take greater financial responsibility and spend more time planning.
At present, it can be time consuming to find answers to even the most basic questions – like ‘how much do I have in my savings pots?’ To get the answers, you might need to deal with multiple companies on various platforms, as well as the administrators of the state pension. Numerous job changes (more than 11 in an average working life) and house moves make it easy to become disconnected from one’s own assets.20
This is a problem initiatives like the UK’s Pensions Dashboard Project seek to address, as billions of assets lie unclaimed by savers. In the future, the process might become easier – not only to identify pension savings, but also to monitor and control what is held in investment portfolios.
People are welcoming flexibility in their retirement options, but often underestimate or are simply not aware of the complexity of the investment choices they face.
“Eventually it might be helpful to move to a single online portal,” Jewkes says. “Through it, individuals could keep a close eye on metrics like their own life expectancy and net wealth. This would give users the capability to move all the sliders on the asset management side, as their needs change.”
As Aviva Investors’ investment stategist Vladislav Mikhailov explains: “People are welcoming flexibility in their retirement options, but often underestimate or are simply not aware of the complexity of the investment choices they face. In the UK, the Financial Conduct Authority (FCA) is very concerned about poor decisionmaking by customers who cannot afford or fail to take financial advice.
“What we have seen is that many retirees end up holding pension pots in cash by default, meaning that they lose out on potential income at a critical time. Others might be very unrealistic about the potential investment performance of their drawdown product.
“Holistic data on assets and liabilities, better engagement through technology, and the optimisation and simplification of investment choices with clear, understandable outcomes are key to enable people to take action in a timely way.”
This would be quite a leap from today, where savers are often poorly informed about the nature of the schemes in which they invest. Meanwhile, the FCA is consulting over how to deliver a small number of carefully-crafted ‘investment pathways’, to prevent consumers failing to make decisions or choosing options that simply don’t match their needs.21
A holistic view would encourage greater understanding of the current position and an appreciation of what could be done to improve it. In the accumulation phase, the opportunity costs of undertaking a second degree or a career switch would be clear. In decumulation, it could improve understanding of the implications of certain choices – for example, the cost of shifting part-time, drawing income that exceeds natural equity dividend yields, or how mortgage release will deplete assets overall.
Although there are specific challenges relating to data security, it could deliver the transparency needed to achieve greater financial flexibility. In the process, some tricky questions can be addressed, such as how much should be put aside to fund social care.
“The big problem with this is that you are trying to plan for something that only ‘may’ happen,” says Danny Cox, head of communications at Hargreaves Landsdown, “It might not.”
He mentions the huge variety of potential health outcomes in later life. Without insurance, an older person might need to cover very high costs; not a problem for the wealthy or those on the lowest incomes who will qualify for support, but potentially costly for the ‘squeezed middle’.
Income options for a longer life
People entering retirement still have very long time horizons, and should consider taking advantage of illiquid strategies with predictable income.
Meanwhile, with pensions freedoms allowing investors to take quite radical steps accessing lifetime savings from the age of 55, Jewkes anticipates much greater focus on addressing longevity risk and delivering lifetime income to tomorrow’s retirees. Asset managers in the US and Australia already highlight its importance for those who might go on to become centenarians or even super-centenarians.
Sophisticated multi-asset portfolios that protect on the downside and participate in the upside, combining asset management and capital markets skillsets, are being suggested as one way to deliver income in perpetuity. Unlike fixed income, these products rebase as equity markets rise. Nevertheless, the products are often not indexed, there may be caps on annual withdrawals (so they won’t be flexible enough to deal with large costs like a family wedding), and are likely to be relatively costly as the assets are combined with an insurance wrapper.
Meanwhile, discussions are under way over the precise combinations of assets that could (potentially) enhance investment outcomes quite materially. For example, including an allocation to illiquid assets such as private credit could, in theory, help achieve this.
“People entering retirement still have very long time horizons, and should consider taking advantage of illiquid strategies with predictable income (like private debt, infrastructure and real estate, for example), to enhance returns and diversify from public markets,” argues Mikhailov. “Over the 30-plus years spent in retirement, a drawdown product with around 15 to 20 per cent allocation to illiquids could potentially add years of income, compared with a similar multi-asset portfolio 100 per cent invested in public market strategies.”
It is hard to implement these strategies in the ‘daily priced, daily dealt’ DC environment, although regulators, who seem to have accepted the principles, are working to simplify the introduction of illiquids in investment portfolios.
Other innovations being considered include retirement-targeted bonds.22 These instruments – suggested by professors of finance Lionel Martellini, Robert Merton and Arun Muralidhar – would differ from conventional bonds in that they would not pay coupons and a lump sum at maturity. Instead, they offer a secure income for an agreed term. The idea is that investors could acquire bonds to cover their income needs in retirement, probably in the later stages of accumulation, before switching to an annuity for late life. Martinelli suggests these bonds could deliver the ‘flexicurity’ investors seek.
Investment circles, where individuals pool assets and then receive a lifetime income greater than that from an annuity (but without the certainty of an insurance-backed guarantee), are also being explored.23 Modern tontines (an annuity shared by subscribers to a loan or common fund) are designed for those who want to convert a pension pot into lifetime income; some have the advantage of paying longevity dividends to living members, drawn from the assets of those that pass away before them. Although it’s early days, they may have the flexibility to include property, and the option to retain assets to pay a legacy.
It is interesting to note that management consultant Peter Drucker anticipated this race to address longevity risk. Back in 1999, he suggested, slightly darkly, that providing financial protection against the risk of “not dying soon enough” might become a major industry in the 21st century.24 He spotted the need to innovate to serve ageing customers better; this is the direction of travel today.
65-year-olds today are the equivalent of 52-year-olds in 1922
Youth: a state of mind?
With expectations of life changing radically, it makes sense to step back and consider the reality of being elderly. Interestingly, more time on the planet is not resulting in more time being ‘old’. In fact, it seems to be leading to ‘down-ageing’, where people behave younger than their biological age.
This is partly the result of current trends, but it goes deeper. Swimming the English channel at the age of 73,25 climbing Mount Everest at 80,26 and heliskiing in one’s 90s27 – these physical challenges have all been achieved. A closer look at mortality data suggests important changes have taken place.
Older people are really very varied. They are more varied than younger people in almost every way,
“A 65-year-old today is very different from a 65-year-old in the past,” according to Scott. “They are fitter, healthier, more productive and work for longer. In 1922, a 65-year-old British male had a mortality risk or chance of dying of 4.3 per cent. Today that is down to 1.3 per cent. The question is ‘Who in 1922 had a 1.3 per cent mortality risk?’ The answer is: 52-year-olds! 65-year-olds today are the equivalent of 52-year-olds in 1922.”
The message from those who have lived for decades is that they do not feel elderly. Take the outspoken 69-year old Dutch pensioner Emile Ratelband. In 2018, he argued in the courts that his real age (69) did not reflect his state of health, which was equivalent to someone in their 40s. In his view, his biological age was inhibiting.28 Legal approval to slice off 20 years could give him opportunities to finance a new house or car, and improve his prospects in work and online dating.
Although Ratelband’s challenge was rejected, it brought some interesting issues to mind. How effective is biological age as a marker of capacity? Not very effective at all, according to geriatrician Claire Steeves, a lecturer at King’s College, London.
“Older people are really very varied. They are more varied than younger people in almost every way,” she says. She cites studies of identical twins that have shown environment trumps genetics when it comes to ageing. Factors like exercise can have a marked effect on age-related decline. As a result, there can be extraordinary differences in the capabilities of people of the same age, even with an identical genetic make-up.
“Aerobic exercise increases the number of connections in the brain; the synapses,” Steeves explains. “It does this through encouraging hormones that make nerve cells grow. It increases levels of key neurotransmitters; the way nerve cells talk to each other, like acytylcholine and dopamine, and it increases the brain’s blood flow, giving the brain more resources to do its work.” Being active in later years will slow ageing, and help keep neural networks alive.
Age and psychological orientation: seeking the positive
As for differences in the way older people respond to emotional stimuli, psychologists believe it is possible to draw broad conclusions.
“All things being equal, older people direct their cognitive resources, like attention and memory, to positive information more than negative,” says Carstensen. “If we show older, middle-aged and younger people images, and we ask them to recall all the images they can, older people remember more positive images than negative images.”
Traditionally, companies have used retirement as a way to ease people out of senior positions, refresh teams and keep the corporate conveyor moving.
This tendency to look to the positive and draw on past experience makes older people better able to negotiate emotionally-charged situations, Carstensen believes. There are other psychological differences. “We take less notice of trivial matters. We savour life. We're more appreciative, more open to reconciliation. We invest in more emotionally-important parts of life, and life gets better, so we're happier day-to-day.”
Overall, it seems older workers may have slower high-level brain function (less rapid information processing and memory), but this can be offset by other areas of cognitive strength (more rounded knowledge, better communication and emotional intelligence).29 Greater understanding of these differences is likely to challenge traditional approaches to human talent. Forward-thinking companies will use this insight to understand and harness their older workers better. Indeed, when we interviewed Andrew Scott for AIQ last year, he pointed out that while much progress had been made around the political correctness over race, gender and sexuality, when it comes to ageism we still have a long way to go.
Rethinking the corporate conveyor
Traditionally, companies have used retirement as a way to ease people out of senior positions, refresh teams and keep the corporate conveyor moving. But as skills shortages emerge, using existing talent for longer, drawing on the knowledge of multiple generations and reducing staff turnover make sense. But to do so, companies need to be more flexible.
These considerations are important for companies struggling to fill posts, and will be more so in the future as the active workforce shrinks. Think of Japan, where unemployment is at a record low, and where job adverts welcoming applications from the over-60s have increased eightfold over the past two years.30 Looking to older workers may also be pertinent for companies simply seeking to engage better and more directly with their greying customer base.
The economic rationale for accommodating older workers is strong. German studies have shown mixed-age teams encompassing older members in a sensitive way (with age-related adaptations) can deliver higher productivity than more youthful teams.31 Professor Peter Cappelli from Wharton Business School, author of Managing the Older Worker, goes further: he cites evidence of better all-round performance from older employees.32
Studies of entrepreneurs also suggest those seeking businesses with scope to grow should be wary of any age- related preconceptions.
“We find that age indeed predicts success, and sharply, but in the opposite way many observers and investors propose,” noted Pierre Azoulay and colleagues from MIT Sloan School of Management in a 2018 working paper, ‘Age and High-Growth Entrepreneurship’. “The highest success rates in entrepreneurship come from founders in middle age and beyond.”33
To make the most of retirement in the future, it might be best to shelve assumptions about what it means.
According to their study of US growth-oriented start-ups, they suggest experience in a specific field is the most important predictor of success. So there is a strong case for age diversity and inclusivity. “Companies will miss an opportunity if they do not accommodate the very large and highly experienced baby-boomer cohort currently approaching retirement,” Scott believes. Doing away with the rigidities of retirement and employing or backing older workers is not virtue signalling; it makes business sense. Expect more of it in the future.
Living with longevity: a gift, not a curse
Longer lives have changed the nature of work and retirement irrevocably. Although having more time on the planet is a wonderful opportunity, it also brings practical challenges, including the need for income to sustain oneself over a long period.
To make the most of retirement in the future, it might be best to shelve assumptions about what it means. The man who began working as a waiter at 89 as he was “dying of boredom” will be an inspiration to many.34 Varied paths that combine paid employment, work with social purpose, learning new skills, plenty of interaction with others and health-giving exercise are all worth investigating. It’s time, Masako Wakamiya believes, to think differently and “plant your own tree in your mind…”
- ‘Brian Loughans, 82, delivers takeaway curries in a suit and tie’, BBC, 27 November 2018
- Senior Planet, 7 October 2017.
- Lynda Gratton and Andrew Scott, The 100-Year Life (Bloomsbury, 2016).
- ‘Transforming World Atlas’, Bank of America Merrill Lynch, July 2018.
- ‘We’ll live to 100 – how can we afford it?’, World Economic Forum, May 2017.
- ‘Demographic trends and the real interest rate’, Bank of England Staff Working Paper. December 2017.
- ‘Why investors may need to lower their sights’, McKinsey Global Institute. May 2016
- ‘Artificial Intelligence: The fourth industrial revolution’, Information Age, 3 October 2018.
- ‘New fitness centers cater to aging baby boomers’, Reuters, 13 May 2013.
- ‘Cyclists over 50 most active in UK, Strava data shows’, Cycling. 19 December 2018.
- ‘How the ageing population is a boon for business’, The Guardian. 19 August 2015.
- Lynda Gratton and Andrew Scott, ‘The corporate implications of longer lives’, Sloan Review MIT, Research Feature, Spring 2017
- ‘Senior-citizen workers in Japan top eight million’, Nippon.com, 20 April 2018.
- Old Age Pensions Act 1908, Commons Library Briefing, House of Commons Library.
- Cohort life expectancy at birth, Office for National Statistics, 1 January 2016.
- ‘Social security smörgåsbord? Lessons from Sweden’s individual pension accounts’, Brookings, 1 June 2005.
- ‘Defined ambition: consumer perspectives’, Department for Work and Pensions, June 2014
- ‘Zygmunt Bauman, Liquid Life, 2005.
- ‘How much should you save for decent retirement? Young workers told, put 18 PER CENT of your salary into a pension,’ This is Money, 25 July 2017.
- UK Pensions Dashboard.
- FCA Consultation paper CP19/5 – Retirement Outcomes Review, 28 January 2019.
- ‘A new retirement bond’, Financial Adviser, 4 September 2018.
- ‘Minimising longevity and investment risk while optimising future pension plans’, ARC Webinar 2018.
- ‘Innovate or die’, The Economist, 23 September 1999.
- Guinness World Records website (oldest man to swim English Channel).
- Guinness World Records website (oldest person to climb Everest).
- Guinness World Records website (oldest heliskier).
- ‘Emile Ratelband, 69, told he cannot legally change his age’, BBC. 3 December 2018.
- ‘Are older workers less productive?,’ World Economic Forum, 4 September 2015.
- Adverts on the job listing website Baitoru, run by recruitment agency Dip.
- Christian Göbel and Thomas Zwick, ‘Which personnel measures are effective in increasing productivity of old workers?’, ZEW Discussion paper, No 10-069.
- Peter Capelli and Bill Capelli, Managing the older worker: How to prepare for the new organizational order, 2010.
- Pierre Azoulay et al. ‘Age and High-Growth Entrepreneurship’, NBER Working Paper, 2018.
- 'Bored stiff' Paignton pensioner retires aged 91’, BBC, 17 March 2018.