Improve your returns by not retiring
In 1881, Otto von Bismarck, the conservative president of Prussia, presented a radical idea to the Reichstag – that the government should provide financial support to older members of society. In other words, a government sponsored retirement. The idea was radical because, back then, people simply did not retire. If you were alive you worked, probably on a farm, or if you were wealthier you might have managed a farm or larger estate. But von Bismarck was under pressure from socialist opponents to do better by the people, so he argued that “those who are disabled from work by age and invalidity have a well-grounded claim to care from the state.” It would take another eight years to bring this to fruition, but by the end of the decade the German government would create a retirement system which provided for citizens over the age of 70, if they lived that long. The qualifying age subsequently reduced to 65 in 1916.
At the time, most potential pensioners would, of course, be dead by 65. So, what was arguably smart politics in 1881 looks like rather flawed policy in 2017. If you reach 65 in good health in New Zealand today, on average you can expect to live another 19 years (male) to 21 years (female). So Bismark’s original idea of promising to provide financial support in the highly unlikely event that you lived long enough to need it has, over a century later, become an increasingly heavy millstone around the necks of western governments the world over. This is particularly so for those governments (like New Zealand’s) who have been slow to adjust their retirement systems in the face of an inexorable demographic trend towards greater longevity.
With people living so much longer these days, the whole notion of retirement has also changed. For many today it looks something like this – work for 40-50 years, then have a party, get a gold watch and get ready for an exciting 20 years or so of golf. Unless you’re really into golf, it might not come as a surprise that some studies have shown that retirement increases the chances of suffering from clinical depression (by around 40%), and of having at least one diagnosed physical illness (by around 60%). Statistically speaking, these could be considered some of the unseen risks of changing from full time work to full time leisure at age 65. Or, more simply put, some of the risks of not having thought through an effective retirement plan. Rather than going cold turkey at 65, for many the answer lies in planning creatively for other options later in life. This could involve scaling work back to some degree (but not immediately to zero!) or even changing careers around 55 or 60, but still working another 15 or 20 years in some capacity.
If you can find a way to extend your working life by a decade or more, even with part time work, you give your retirement savings that much longer to grow. It’s not uncommon for people to ‘retire’ from jobs they hated a decade (or more) earlier than they thought financially possible. This can work wonders for your stress levels and quality of life, as long as the income from your substitute job is enough to cover regular expenses. Often, these ‘retirees’ can’t keep saving for retirement, but, more importantly, they don’t need to dip into their retirement savings either. Don’t underestimate the effect of another decade of compound interest on your savings pool at that point in your life. It’s a very big deal.
The real icing on the cake is this – if you realise that you aren’t going to retire, then maybe you don’t have to keep working at a job that’s slowly driving you insane. For many people, retirement is the light at the end of a deep, dark tunnel called a career. How about flipping that paradigm on its head so that the end goal isn’t to stop doing the wrong kind of work, but to start doing the right kind of work? With that mindset, just imagine how much more enjoyable those later working years will be.
Or maybe that long-awaited retirement party and the gold watch will keep you satisfied for the next 20 years. And hey, there’s always golf, right?