Retirement: ready or not?
We were vacationing last month in Scotland. At a small country hotel—on a misty Western isle—I mentioned to a group of guests that I conduct research at Vanguard on retirement issues. You guessed it: Suddenly the conversation shifted from the weather (ever-changing in Scotland) to worries about finances and retirement security.
It’s uncanny how similar retirement stories in the U.K. and U.S. are. The British guests talked about a decline in preparation for retirement—falling savings rates, rising debt levels, and a culture of consumption. A Scottish couple in their 80s raised a well-known complaint: Baby boomers were self-indulgent and lacked fiscal discipline.
Two other guests brought to mind another important dynamic. The husband had retired early on a generous final-average-salary scheme—a traditional pension plan—as rare in the U.K. as in the U.S. His spouse was a public servant. As in the U.S., retirement plans for U.K. public employees are of the traditional pension variety. They are also generous. In the British press, there’s talk of “pension apartheid”—risky defined contribution plans for private sector workers versus generous traditional pensions for government workers. (How long, we thought, before the situation leads to social conflict?)
The other gloomy topic was long-term care. One U.K. guest spoke of the challenges of caring for an aged parent who was unable to manage most activities of daily living. Nursing homes were seen as inadequate; the system of home care, patchy and uneven. They paid large out-of-pocket expenses for daily help in a system struggling to support modest levels of home care.
It sounded all too familiar. We recently had to navigate the U.S. labyrinth of long-term care for an older relative. Medicare moves as quickly as possible to shift debilitated patients off its books once they no longer need acute medical care. Then there are the challenges of finding and financing private or Medicaid-funded nursing care. We all agreed: The problem is not going to get smaller in either country.
There are, of course, positive trends on both sides of the Atlantic. Working longer can be a real help, both in improving finances and helping psychologically in the transition to retirement. Maybe, the Scottish couple said, the credit crisis will mean higher savings rates and a permanent end of the consumption culture. We all silently agreed. And it’s true that in both countries, and around the world generally, we are all living substantially healthier and longer lives.
Still, in both countries, the retirement outlook seemed increasingly turbulent—much like the Scottish weather, with patchy clouds, misty rains, and an occasional break of sunshine.
Working longer is a real help.
Many people I know have responded to this crisis by saving more and eating out less and shopping less, etc. But in order to get out of this recession don’t we need to start spending again? Isn’t a culture of consumption a necessary evil in order to recover from this mess? The reality is a big part of the U.S. economy depends on consumer spending.
I really appreciate this post. I think Vanguard should do more articles on cross-country comparisons of retirement systems, post-retirement medical issues, etc.
I believe that most Vanguard investors are smart enough to understand what the two real problems regarding care of the elderly are: demographics (more old folks, fewer young people) and increased longevity (thank goodness!).
How could it be inexpensive and easy to care for more and more of us as we age? Our children’s incomes are not increasing, and they have their own children to support, let alone saving for their own retirement. No one is to blame or is being stingy; we simply must plan for and take charge of our own later years.
I enjoyed the story, gloomy weather and retirement outlooks, but I bet the beer was great!
As an 80+ woman still working part time in the health care field, I found your ideas in line with my life long financial principles. Living through the great depression formed me well. thank you.
I will be 58 in November and have worked a steady 40 hour plus week since I was 18. I think it’s important for us to have enough money to be self sufficient in retirement but feel people should retire while their body parts still allow them to do the things they have always wanted to do for at least 15 years after they retire….and not worry so much about what will happen when they can no longer function. I haven’t worked all my life to give my retirement savings to a nursing home nor do I want to work up to the time I will need to be put in one.
Thanks for the post. I live in Canada, and work in the retirement savings business. The similarities you drew out between the UK and the US also fit, in large part, on the Canadian landscape. (No gloomy weather here though!) We also have more DB plans still open than the UK and US. However, corp plans are showing signs of “fatigue” and we expect many corp db plans to close in the next 3-10 years. We’ve moved into an interesting period where pension reform is now a live topic (and not one reserved for the pension geeks) There’s a rich dialogue unfolding about pension coverage, retirement income adequacy, mandatory vs voluntary plans, DC vs DB, the role of the state plans (CPP/OAS) and, to the points raised in this blog, the role of individual savings and personal financial accountability. As the Chinese proverb notes: may you in interesting times!
Kudos also to Vanguard for the timely research insights, especially on DC plans and the issues surrounding them. I’m a fan!
A recent story circulating on the internet concerns an elderly woman observed sitting alone having lunch, but hovered over by numerous waiters who seemed to know her well. Turns out that she is on her fourth consecutive cruise, having determined that cruising was cheaper than a nursing home, the service is much better, the staff more attractive, and meals are available 10 times a day!
She gets much more value for her retirement dollars, medical services are on board, and, she is quoted as saying (probably apocryphally), “If I die, they can just throw the body overboard!”
Moral: we should all look around for improved means of dealing with our retirement needs; if left alone, the market may come up with answers.