So, how well do you understand the realities of retirement?
The World Economic Forum and Mercer have been exploring how retirement might be reimagined to handle life’s complexities, such as health and longer careers.
By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer
Mercer has partnered with the World Economic Forum (WEF) for many years, and together they are now exploring how to redesign retirement in such a way that builds financial resilience for longer lives in the face of many competing challenges and pressures. Part of this process has been considering the true complexities of retirement, wherein investing and building assets, etc., are important, but also taking into account other critical issues, such as your (or your partner’s) health, the ability and environment to work longer, among others.
I participated in one of the WEF’s virtual designed thinking sessions in the US on June 3. There had been prior designed thinking sessions around the world including the inaugural session at the WEF Annual Meeting 2020 in Davos (details at Redesigning Later Life). But my more recent experience with this topic was made more particularized and personal — the results of our designed thinking session engaged around a case study of Francis, a successful HR leader, age 62.
Francis: Caring for loved ones in retirement
Francis is married to Helen, and they have an adult son living in London. He has indicated he wants to slow down and spend less time in the office.
At first glance, Francis has a healthy pot of retirement assets in a 401(k) and IRAs.
But, in Francis’ own words, he is “worried about the prospect of his wife needing long-term care.” Unfortunately, Helen has some early signs of dementia, something that has been common in her family. Her mother had passed away this year from COVID-19 while living in a long-term care facility.
Our discussion group included several defined contribution (DC) plan sponsors, several academics and some WEF representatives.
For me, the discussion was intriguing, particularly since Francis’ case was not unlike other situations that some of the participants in the session had seen or experienced in real life. Our discussion culminated in three observations for me:
- Francis may want to retire early to make sure he can enjoy some time with his wife and visit his son before mobility and communications become more challenging.
- He may need to start to consider how to adapt their living arrangements, perhaps including where they live, to address the demands that dementia may bring.
- Given the likely need for some form of assisted living or long-term care, Francis’ retirement assets may be insufficient. He simply may need to work longer.
What was clear was that Francis faced several competing challenges. One possible career strategy we liked was focused on encouraging Francis to work less now, but for longer. So he would potentially need to look for a more flexible working position, ideally with his current employer. The second issue centered on shortfall risk. Even though it was clear that Francis had saved and prepared well for retirement — he appeared to have made all the right choices — his future prospects were put at risk due to his wife’s unfortunate health issue.
Of course, this was all an academic exercise, and at the end we could turn off Zoom and just go back to our normal lives. However, it served as a great reminder of the challenges that many people face in retirement and why flexibility is needed to deal with these complexities.
World Economic Forum and Mercer: Retirement Reinvented
Given its very real and human dimension, this one discussion had a profound effect on me. But the WEF and Mercer have spent a lot more time considering the many issues that arise from life transitions. Francis’ was but one of many other real-world retirement insecurity scenarios that was constructed. In fact, the research team compiled the insights of more than 200 experts from a variety of global health, finance, business, insurance and academic organizations, which you can find here.
Based on the research, a 10-point checklist for retirement success was developed, which very importantly requires a coordinated effort across at least four constituencies (individuals, employers, financial services providers and governments). It is clear that defusing the timebomb of an aging workforce will require far more than making a few simple design adjustments to retirement systems. Here’s the checklist, quoted in entirety:
You
- Unlock creative additional income sources that can support you in later life — teach if you can, participate in the sharing economy, make things.
2. Improve your financial know-how so you can plan with confidence — don’t leave financial outcomes to guesswork.
3. Your health and your skills underpin your ability to work, earn and save — invest in them.
Employers
4. Create more flexible work and retirement models so that people can work, earn and save into later life to supplement low pensions.
5. Employees trust you to help them retire well — promote wellbeing programs that include physical, mental and financial support and education, in order to deserve that trust and develop resilient employees.
6. Enable mid-life and ongoing regular check-ups so that people can assess their short-, medium- and long-term financial resilience, with time to get on track.
Financial services providers
7. Make it easier for people to understand their total financial position. Financial resilience means being able to survive short-, medium- and long-term scenarios.
8. Redesign age-appropriate financial tools and products with age in mind — remember, no one self-identifies as old! Accessibility to such vital resources is key.
Governments
9. Raise levels of awareness of the financial implications of longevity; ensure that employment and pensions regulatory frameworks support flexible work and flexible retirement. This means enabling drawing pension while still working, and drawing pension earlier or later depending on personal circumstances.
10. Impose tougher penalties for age bias — too many older workers become excluded from the workforce because of age. Financial resilience will never be achieved if people cannot work, earn and save.[1]
So, what now?
It’s left to us to reflect on what the reality of retirement will look like, and consider what part we all have to play in reinventing retirement into something that better addresses the real needs and concerns of individuals. A useful starting point is to consider how we would ourselves like retirement to look like (and I don’t just mean two Adirondack chairs overlooking the beach).
Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.
[1] Andre Belelieu and Yvonne Sonsino, “Coronavirus is creating retirement insecurity. These 10 steps can defuse the timebomb of an ageing population,” World Economic Forum, August 3, 2020. https://www.weforum.org/agenda/2020/08/here-are-10-steps-to-diffuse-the-timebomb-of-an-ageing-population-post-covid19/
