Living a long time used to be a blessing, but the American savings and retirement model means that many people have to worry about running out of money.
“120 years ago the life expectancy was 47 years. Today's life expectancy is 78 years,” Dan Houston, Principal Financial’s CEO and president said at Yahoo Finance’s All Markets Summit last week. “You just think about adding another 30 years. 50% of the children that are born today in developed countries will make it to age 100.”
The concept of “longevity risk” has emerged as longer lives became the norm, straining the Social Security model. Both Houston and Edelman CEO Richard Edelman noted that today’s youth is much less confident about Social Security being there as a social safety net.
“They see it more in their control,” he added.
But even if new generations understand that it’s probably up to them to finance their own retirements, the responsibility is huge. Not only is it challenging to save enough, but it’s challenging to even know how much will be enough. In the past 30 years, the average retirement age went from 63 to 63 and 9 months, said Houston. In that same period, longevity increased by 10 years.
“Now you have to solve for having enough in the way of assets and financial support to last for 20 or 25 years,” he said. “We're talking about a 40-year period of time.”
This “longevity risk” hasn’t just plagued retirees and families trying to support them in their later years. The insurance markets’ long-term care policies have long been viewed as potential problems. With longer life spans, financial reserves backing insurance policies may not be sufficient.
If everyone lived a life a few years longer than expected, it could cost insurance companies billions of dollars. Since many policies are very old, introduced in the middle of the 20th century, there was no way of knowing that the future would have such long lives in store.
The costs have also slammed businesses with pensions. General Electric (GE) recently froze pensions for 20,000 workers and offered buyouts to 100,000 former employees in a cost-cutting measure. Being on the hook for future pension payments is simply too expensive given current life expectancies.
How much to save
The big takeaway from the changes at GE is that the American private pension is all but dead, putting the responsibility of surviving retirement firmly on individuals and their families. Not only have the risks and responsibilities of having a nice retirement transferred from companies to workers, but the risk has grown with the length of retirement.
Though it’s hard to even give any rough guidelines for savers, Houston threw out some numbers: save 15% of your income over the course of a 40-year working career — starting right out of school if possible.
The good news is that savings rates are at least improving among the younger generations.
“If you just looked at the average savings rate of [Generation X, Y, and Z], their average deferral in 401(k) savings program has increased by 25% since the crisis,” said Houston. Of course, not everyone has a 401(k), and an improvement of 25% may not address the needs of the future.
“If everyone in this room spent half as much time planning for their financial future as they did for their next holiday trip away, we would be as a society very, very well off,” said Houston.