Living in Retirement

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Ready to live to 100? Here's why you should be

August 05, 2013

For most of today's retirees and near-retirees, living to 100 is still fairly unlikely. But increasing longevity is transforming the experiences of millions of retirees. When Social Security was getting its start in the 1930s, average life expectancy in the United States was less than 65 years. Today, at that age, a man can expect to live, on average, about 19 more years and a woman about 22, according to the Social Security Administration.

We recently interviewed two experts—Olivia S. Mitchell, a professor at The Wharton School of the University of Pennsylvania and executive director of its Pension Research Council, and Stephen P. Utkus, director of the Vanguard Center for Retirement Research—about trends in retirement, especially the implications of increasing longevity.

Why you should plan for a long retirement

Actuarial studies show that a 65-year-old woman has a 53% chance of living to age 85 and a 32% chance of living to age 90. Our interactive calculator lets you estimate your probability of living to a specific age.

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Here are excerpts of the conversation:

Media coverage about retirement sometimes focuses on the negative, such as shortfalls in savings or fiscal problems for government programs. Are there positive developments as well?

Steve UtkusSteve Utkus: Certainly there are. On the positive side of the ledger, people are living both longer and less physically impaired lives. Of course, individual circumstances can be quite different, but on average, people are enjoying healthier, longer lives.

Olivia Mitchell: And not only are people living longer, but the jobs that are available are more and more likely to be amenable to people who aren't able to meet physically demanding requirements. Forty years ago, people had to be able to lift weights, to exert a lot of physical energy on the job. Nowadays, the jobs are less physically demanding, meaning that we can, and probably should, continue to work longer as longevity expands.

Not everybody would see working longer as a positive thing.

Olivia MitchellOlivia Mitchell: True, but there are indications that people who work longer—that is, retire later—are more likely to remain healthier, to keep their mental acuity, and to retain the social bonds with their colleagues and friends at work. I think that's particularly important given that family structures have changed so much over time.

There's an opportunity in working longer, but the opportunity should be understood earlier in life. In other words, I don't think one can wait until one is 65 or 70 years old to say, "Oh my goodness, I should invest in my skills and update my training." Instead, that process of investment in human capital has to start young and continue throughout one's life span. This will make people more interesting to employers, more employable, and also, obviously, better attached to the labor market and the networks that are now available to us as we age.

Steve Utkus: Adding to what Olivia was saying, longevity is really at the heart of the whole matter when you're discussing the future of retirement. Not only is there a need for people to consider working longer because of increased longevity, but also the demographic changes, people's increased life spans, are putting pressure on the public retirement programs, such as Social Security and Medicare.

Looking out into the future, longevity is expected to continue to rise. Based on current data, children born after the year 2000 in rich, developed countries are expected to live to 100. Not all children, of course. It depends on the country, and there's wide variation between different groups based on education, income, wealth, health status, and health access. There are all kinds of other factors, but on average, if you had a child or grandchild born in 2000 or later, there's a very good chance that child will live to 100 based on current knowledge. This is not some wild extrapolation of trends.

How well prepared are Americans for retirement?

Olivia Mitchell: Forecasts are always easy to make, but they're often hard for the forecasters to stick with. That said, my summary of where the current research stands is that there are essentially two camps. One camp says that the percentage of Americans unable to maintain an adequate living standard in retirement is somewhere between 15% and 20%. Another group says that actually the fraction of people at risk is much, much higher, maybe 50%.

Yet both camps assume that Social Security and Medicare will continue as they are, without any benefit cuts or tax increases. And this is simply infeasible: Social Security benefits under current law cannot be paid in full, since the government is unlikely to take in the revenue to cover them.

What do Americans need to do to be better prepared?

Steve Utkus: The transformation that has to occur is cultural. We need to create a culture of saving. Some things have already begun happening to promote more saving, and that's encouraging. For example, 401(k) plans are becoming more automatic, with automatic enrollment and automatic contributions. And in some ways, the financial crisis has realigned people's expectations about the role of debt, the responsible use of credit cards and mortgages. Debt levels have fallen meaningfully from their recent peak. But they are still substantially higher than 40 years ago. I think this grand realignment toward saving still has to occur to make it possible for people to have more secure retirements.

Olivia Mitchell: Clearly one part is that we must save more. Another part is that we must think a lot more about insurance. My research focuses on annuities, especially payout annuities, and other vehicles to help people protect their savings against their living too long, or longevity risk.

The notion is that even if you do accumulate a nice nest egg, since you never know exactly when you're going to die, there's some role in the household portfolio for insurance against outliving your assets. This would not apply to those with very low incomes, but certainly it does for the larger middle class: there's real potential and need to think about longevity protection in the form of insurance.

You mentioned pressures on government programs associated with longevity. What are potential strategies for dealing with those pressures?

Steve Utkus: I like to look internationally for comparisons, and one of the countries with the most sustainable retirement benefits programs is Australia. In Australia, there's a government pension program—you might call it the Social Security equivalent—which is a flat dollar amount that everyone gets. It's not like the United States where the more you earn, the greater your benefit. In addition, the Australian benefit is means-tested—eligibility is based on an individual's means—and it's paid for through the income tax system. So it's a very different minimum benefit. The other thing to note is that it has, as I said, high scores for fiscal sustainability.

To supplement that, the Australians have introduced compulsory private saving, so that individuals will have additional resources. I think the Australian approach is an interesting one.

Once people retire, what tends to happen with their spending patterns?

Olivia Mitchell: There's been some fascinating research looking at people's expenditure patterns before and after retirement. An initial concern arose because when people retire, they appear to spend about 25% to 30% less per year. So the initial conclusion was that people discovered that they were more financially strapped in retirement than they anticipated, and that's why they reduced their expenditures so much.

But follow-on work showed that, actually, this was evidence of a more interesting phenomenon: in retirement, people substituted time for money. For example, instead of going out to dinner, retirees cook more meals on their own. Or instead of shopping at the convenient food mart on the way home because they had to get dinner on the table, they would find the bargains and go to several different supermarkets.

Steve Utkus: This is an effect that goes along with making the transition to retirement. You have more time to think about exactly how you're allocating your money and time, and whether a given expenditure is worth it. With more time, households are willing to take on responsibilities that they used to pay for. We call it "home production."

We've talked about the financial aspects of retirement. What about the emotional? How do retirees feel about their situations?

Steve Utkus: Research has shown that, in general, retirees are happier and more satisfied than workers anticipating their retirement. It seems that there's something about the actual act of retirement that does appear to result in some sort of generalized satisfaction.

If you ask retirees about their lives overall, not just about their financial situations, they seem to have a much higher degree of satisfaction than people do before retiring. Is this just coincidental, what social scientists would call a cohort effect, or is there some sort of psychological boost with the act of retirement? It's an interesting question.

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