Light blue paper and retire immediately

By Dave Crawford

In the 1950s, my best recollection of the word retire was that it appeared on fireworks.  “Light blue paper and retire immediately” was the text on every firework.  That use of the word has been gone for a while now and in truth, I believe that the other more common use is running out of steam as well.  By that, I mean the use of the word retirement to describe what happens when you finish your formal career because you have reached the retirement age of your employer.

This all started in the 1870s when Otto van Bismarck, the “Iron” Chancellor of Germany suggested the retirement age of 65 to industrialists.  The reason for this was that German workers died, in those days, at an average age of 66.  Bismarck felt that letting someone stop working at 65, with a year in which to get his or her affairs in order before dying, was only reasonable.

If you only had to provide enough money to last for a year or two after retiring, retirement might not seem too daunting.  Unfortunately, now that we live a great deal longer we need a lot more money to have a decent retirement.  Clem Sunter, at the 2004 Institute of Retirement Funders Conference put it brilliantly, when he said, “The trick about retirement, as I see it, is to make sure that the money lasts as long as you do!”

And therein, to quote Shakespeare, “lies the rub”.  A lot of South Africans, our baby boomers, are retiring soon.  They have accumulated money for the most part through employee pension funds, based on a model that worked in the 1870s.  Most have moved from funds that offered guaranteed pensions based on length of service to funds that depend, for an end result, on investment performance.  Most of them believe that somehow it will all work out in the end.  The pension funds industry has done little to make them aware of their situation.  Nor have most employers.

Big employers gave up offering guaranteed pensions because of the risks of inflation, people living too long and investment returns not always being able to make up the difference.  They shifted this risk to people who have far less ability to cope with these risks.  To make it worse they warned no one of these risks.  Quite the opposite, most employers, on the advice of their consultants sold the idea of a defined contribution retirement fund as a better deal.

So relatively unsophisticated employees moved from funds (known as defined benefit funds because the benefit was usually a pension based on a percentage of salary at retirement) that offered certainty to complete uncertainty on promises of a better end result.

Thanks to some poor investment results, many of these people will be worse off than if they had stayed put.  They just never understood the risks.  They also never understood the perspective.  That perspective shows that most will have to live a long time on very little in retirement.

People who are younger will have longer to live and will need to plan differently.  The baby boomers present the most immediate problem.  Being in their 50s and 60s it is getting late to make up the financial shortfall in the time left, so many must give thought to extending their working lives.  Employers are not too keen on this because many see retirements as a tool in transformation.

So to a large extent the older “ballies” are on their own.  And youth should see this as an object lesson because they will be faced with similar or longer terms of “retirement” as their life expectancy lengthens.

Harking back to my comment on the firework, perhaps retirement is the wrong word to use for what comes down to meaning the end of formal employment.  There is little question that most will leave formal employment when they still have lots of talent and energy left.  Most will also not have enough money to last comfortably if they cease all money-earning activities.

Retirement investment strategies also haven’t helped; many retirement investment strategies seem to think that lives end around 60.  People at 55 are investing for five-year horizons when they probably have another 25 years to go.  Investment strategies are very different for a 25 years term with the possibility of greater returns.  The recurring short-term strategies carried out for older people harm them with underperformance.

Maybe the biggest problem about all this is that so few people have a perspective on it.  A cartoon of a couple doing their retirement planning published in Noseweek had the line “If we retire late and die early, we might just squeak through”.  This sums it up as neatly as Clem Sunter’s line.

Take all the above and then add that retiring fund members need to choose their own pension instruments when they retire.  Education is spotty, and the very people who have products to sell do most of it.  Unsophisticated people are talked into buying unsuitable products.  Living annuities are marvelous vehicles for people who have large amounts of money to invest.  They can also mean disaster for those who retire with little.

Every one of us needs to understand the significance of our working lives.  There is a beginning and an end, and we must use our working lives to provide both the skills and the investments to have a complete life.  When we stop formal employment, we should move smoothly into the next phase in a well-rehearsed transition.

There are no guarantees of getting it right but the responsibility is that of the individual.  And this should start young.  A little help seemed available when the Pension Funds Adjudicator determined that the trustees of a retirement fund must make sure that members can make “informed decisions”.  Not much has been done to make that happen and it shows when we find that over 76 percent of people who retired in the year ending June 2015 invested their money in the one type of pension product that pays the best.

D.L. Crawford
CFP
Friday, February 26, 2016