Retirement at 65? Who decided that?

20 Mar 2018

Mark Henson

Wealth manager, Investec Wealth & Investment

Given that people are living longer, companies need to question the wisdom of keeping the retirement age at 65 – and we should be adopting more flexible investment strategies.

I’ve often wondered why the normal retirement age is 65. Who decided that this is the right age to stop working, and on what basis? 

 

With only 5% of SA's population able to retire and maintain their standard of living, a 95% failure rate can’t be right.

Forced to retire when still willing and able to work

My mother was forced into retirement when she turned 65 last year, and through her, I experienced the realities of this milestone, or life event, for the first time. The psychological stress of going through this process has been quite a thing. My mother wasn't ready to leave work, her colleagues didn't want her to go – and yet the employment contract and pension fund rules dictated that her employment had expired.
 

Is the retirement concept still working?

As a result, I've been questioning the legitimacy of this concept and whether age 65 is relevant in today's world as a 'normal' retirement age. From a financial perspective, the generally accepted industry norm is that you should spend two-thirds of your life in the accumulation phase saving for retirement, and a third in drawdown.
 
Through medical advancements, life expectancy is being pushed out all the time, so this is a dynamic reality and one that requires regular revision. For example, a third of babies born in 2013 in the UK are expected to live to 100. These developments require a change in the way we manage our finances.

When did the pension start?

The pension, as a concept, was born in the 1880s, when German Chancellor Otto von Bismarck was facing a social revolt and needed a mechanism to pacify the nation.

His solution was to introduce a social pension scheme which promised support from the government for older citizens. Initially, 70 was chosen as the retirement age, but this was later lowered to 65. Employers, employees and the government would all contribute.

Life expectancy

The challenge with the system at the time, from a societal perspective, was that life expectancy was a lot lower than it is today, so few people enjoyed the benefits of this scheme in its earlier years. The US adopted a similar model more than 50 years later, and the magical number of 65 was also chosen – and in many instances, this is still in place today.
 
The world today is different in so many ways from what it was 130 years ago. If the futurists are correct and the first person to live to 150 has been born, why is the normal retirement age still 65? Should the retirement age be the same across all industries?

Golden years

An individual who has been involved in hard physical labour their whole life is surely not expected to live to the same age as someone like me, who has been fortunate to work in a comfortable office environment. If we go back to the one-third, two-thirds principle for savings and dissavings, the question arises: If I go on to live to 125 and I started working in my mid-20s, surely I should consider retiring at 90 years old? The plan of early retirement at 55 appears now to be the stuff of dreams!
If I go on to live to 125 and I started working in my mid-20s, surely I should consider retiring at 90 years old? 
You could, of course, build a counter-argument to my theory of extending the retirement age beyond 65, looking at the South African perspective. With youth unemployment at unacceptably high levels here, some may feel that more people should be vacating their roles to make room for the next generation. To some degree, this is valid. From an employer’s point of view, experience and corporate memory must influence one's thinking of the ideal mix of youth and experience in one's business. Older employees can play a role in mentoring younger employees, for example. Policymakers typically consider factors such as demography, the fiscal cost of ageing, health, life expectancy, nature of the profession and the supply of labour force, etc, when deciding on the retirement age.

One in five of present-day retirees experiences depression

According to the Mental Health Foundation, one in five of present-day retirees experiences depression. This often happens because people lose the sense of purpose that working provides, or because they lose the social interaction of the workplace. Those living alone because of bereavement or divorce are even more at risk, while physical health problems can also make people more vulnerable to mental health issues. Recent studies have indicated that retirement increases the chances of suffering from clinical depression by about 40%, and of having at least one diagnosed physical illness by 60%.

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Strategies for working and investing

Many workers have adopted a strategy of scaling back on their jobs at about 55 or 60 or even changing careers, but still working for 15 to 20 more years. By investing in flexible investment products, you can defer retirement and maximise your probability of living a comfortable, sustainable lifestyle.
 

Mandatory retirement and age discrimination

There are lessons that we can learn from other countries. In Australia, the retirement age is to be increased gradually to 67 by the year 2023. Since 2011, employers in the UK can no longer give employees notice of retirement under the default retirement age provisions and need to objectively justify any compulsory retirement to avoid age discrimination.
Since 2011, employers in the UK can no longer give employees notice of retirement under the default retirement age provisions.
The US Code of Federal Regulations discusses age discrimination in the Employment Act, saying that an employer can no longer force retirement or otherwise discriminate on the basis of age against an individual because he or she is 70 or older.

In the Roman Catholic Church, Pope Paul VI introduced a mandatory retirement age of 70 for priests and 75 for bishops and archbishops. There is no mandatory retirement age for cardinals or for the pope as they hold these positions for life, but cardinals aged 80 or over are prohibited from participating in the papal conclave.

Many people turn to the church when key life questions require answers, and perhaps we should take some direction from the church on the question of a more appropriate retirement age. Arguably, the entire concept of retirement is flawed and we should be looking at a gradual process rather than a single, abrupt event. As for my mother, as she enters 'the afternoon of life', she's off to the UK to try to find employment – because, from a financial, mental, emotional and wellbeing perspective, she can't afford to retire.

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