- Spending patterns in retirement are unpredictable. Finances must often stretch further and be more flexible.
- Savings products must meet changing financial demands in retirement.
- The need to have control over risks and finances doesn't just apply to individuals but also to product providers.
We are living longer. This positive trend has inevitable implications for planning the future, including how we manage our long-term finances.
At the state level, some governments have already responded to an ageing population by progressively raising the retirement age with the objective of limiting the drain on state pension expenditure. But there is also an obligation on the individual to do more to fund their (longer than ever) futures.
Forget the old role models
One way to do that is to work for longer. Individuals aged 55-64 now account for the fastest-growing participation rates in the labour market across the EU1.
The European Commission predicts that total participation rates for older people will be higher by about 6.4 percentage points (pp) in 2020, 13.9 pp in 2040 and 14.4 pp in 20602. This compares with a projected increase by 3.5 pp in the participation rate for those aged 20-64 in 20603.
Granted, continuing to work may still prove unpopular with many people. However others, supported by positive role models, are increasingly starting to see it as an opportunity not only to gain control of their finances, but also to ensure a more active and flexible role in society. Moving away from old traditions and role models is very much seen in a positive light by the older generation.
“People are now more mobile than they used to be; the line between working and private life has become more blurred. Accordingly, people want to make their own decisions and act in a self-determined and flexible way,” is how Thomas Buess, Chief Financial Officer of the Swiss Life Group, sees this trend.
Peaks and troughs
Flexibility is key to managing one’s finances in retirement since demands on income tend to go through peaks and troughs.
In the early “active” years retirees may have relatively high spending patterns as they engage in hobbies, travel and socialising. Then, as individuals slow down and become less mobile, outgoings may decline, only to rise again in later years as the need to pay for long-term care arises4.
In addition, there may be unexpected or one-off events to pay for, such as a wedding, divorce, health problems or home maintenance.
According to Lena Dorin, health and long-term care senior policy officer at the German National Association of Senior Citizens’ Organisation, some individuals will be fully prepared for the ebb and flow of financial demands in retirement, while others will struggle.
“Older citizens are a very heterogeneous group: we have older people who definitely have enough money to cover for unexpected events during retirement. They have enough financial resources and will not be in a miserable situation when only money is necessary to solve the problem. But of course we have seniors who will not have enough money to do so,” Dr Dorin explains.
A willingness to work longer not only has the potential to avoid a “miserable situation” financially; it can also prolong physical health in later life.
Axel Börsch-Supan, director of the Munich Centre for the Economics of Ageing, says: “Being active is much harder in retirement than when you work. In a job you are forced to be active. In retirement, you don’t have to get up in the morning, and being inactive is not good for you.”
If retirees want to achieve financial independence in their later years, they will need the support of suitable savings products.
As Mr Buess explains: “Our customers plan their lives based on our promises. That is why we give the security of our promises the highest priority. If you want to act over the long term, you need to have control of your risks and finances. That doesn't just apply to individuals, but also to product providers.”
Building a long-term savings portfolio that can support a long and varied retirement is attainable, but for citizens to meet this goal, they need to understand their finances and be willing to take control. It is then the role of governments and financial services companies to support them in achieving this important objective.
At the same time, product providers are obliged to expand their offering. They must focus on two key factors: long-term security and flexibility in accumulating and drawing on savings.
1 The 2015 Ageing Report; Underlying Assumptions and Projection Methodologies, EUROPEAN ECONOMY 8|2014, European Commission (Page 57)
2 The 2015 Ageing Report; Underlying Assumptions and Projection Methodologies, EUROPEAN ECONOMY 8|2014, European Commission (Page 52)
3 The 2015 Ageing Report; Underlying Assumptions and Projection Methodologies, EUROPEAN ECONOMY 8|2014, European Commission (Page 57)
4 Estimating the True Cost of Retirement, David Blanchett, CFA, CFP® Head of Retirement Research Morningstar Investment Management, LLC (Page 13)