With more of us living longer, traditional retirement plans just won't cut it

By Andrew J. Scott

Whatever your age, you need to invest more in your future to ensure you age well

We can expect to become old, yet we worry about outliving our health, our wealth, our skills, our relationships, and our sense of purpose.

In 1935, President Franklin D. Roosevelt signed the Social Security Act and Americans aged 65 and over were able to expect a regular pension during their retirement. At the time, life expectancy stood at 61 years. Today, the American Academy of Actuaries predicts a typical newborn will live to at least 85 years and has a one in six chance of making it to 100.

That is a profound shift in what it means to be human. For the first time ever, the young and middle aged now have a greater-than-even chance of becoming old. There have, of course, always been old people, but previously only a minority of the young went onto become old. Now it's a majority.

A common response to those facts is to worry about what will happen to Social Security, which is expected to run out of money in 2035. That is a limited way to consider such a profound change. What is required is nothing less than a fundamental change in our society, economy, health system, culture and psychology, as well as our financial system, to ensure that a longer life is also healthier, productive and engaged.

We now face a longevity imperative. We can expect to become old, yet we worry about outliving our health, our wealth, our skills, our relationships and our sense of purpose. The result is that whatever your current age, you now need to invest more in your future to ensure you age well.

A key component of this longevity agenda is to ensure we remain productive for longer. That is a very different issue from the solvency of the Social Security fund. Postponing retirement, reducing the generosity of Social Security and increasing taxes all help ease the pressure on government finances. What they don't do is tackle the core issue of how we remain productive for longer.

How we finance pensions is not ultimately about money but about real resources. It is true that one way of financing a longer retirement is to save more, and it's a tactic that financial advisers are keen to encourage. But doing so just means you have less to spend today and so experience a drop in your standard of living.

To avoid that, the only solution is to be more productive over your lifetime. Absent AI-related surges in productivity, this requires working for longer. Raising the age at which you can claim Social Security doesn't keep people working when the majority of Americans have left the labor market by 65. Instead, we need to focus on ensuring our health and skills remain good enough to support longer careers. We also need to keep a careful eye on whether the occupation we are in is age-friendly and can support these longer careers.

Focusing only on saving as a solution is suboptimal. Retirement planning requires answering four difficult questions: When will I stop working? How much money will I need in retirement? What return will my money earn? How long might I live?

These fundamental questions have become more important and more uncertain because of increases in longevity. The result is that financially adjusting to longer lives demands a mix of strategies. If you are going to live longer, you may, depending on your circumstances, be able to take on more investment risk to seek higher returns. Saving more will of course also help.

But it is also hard to move away from the conclusion that investing in your own human capital (health and education) will be key. That way if you need more money, you have a chance of being able to earn it by working for longer. That presumably is why one in four older Americans say they are "unretired."

Read: 401(k) plans lack one benefit that would make a big difference in retirement

But retirement planning needs to change in other ways too. Being longevity-literate is crucial. Knowing your average life expectancy is important, but in fact, only around 3% of Americans each year die at average life expectancy. Around 20% them died over 90 and a growing proportion are living beyond 100.

For the canny investor there are likely to be interesting opportunities.

The 21st century will require "living insurance" - a way of providing income even if we live to 100 and beyond. We need more products that help provide fixed income regardless of how long we live. We will also need life insurance policies that help keep us healthy and alive for longer by providing financial contributions to the future drugs that will emerge aimed at tackling age-related diseases.

For the canny investor, there are likely to be interesting opportunities. Right now, investors are encouraged to take note of the "silver" economy. The AARP calculates that those aged over 50 contribute 56 cents of every dollar spent in the U.S. That is frequently used to highlight the investment opportunities that, for example, cruise ships, care homes and adult-hygiene products represent.

But this misreads the real opportunity that awaits - the enormous demand for products and services that help us age better and remain "evergreen."

Andrew J. Scott is professor of economics at London Business School and author of "The Longevity Imperative : Building a Better Society for Healthier, Longer Lives" (Basic Books, 2024).

More: The U.S. birth rate has never been lower. Here's what that means for stocks.

Also read: Baby boomers and millennials are robbing Gen Z of a bright financial future

-Andrew J. Scott

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05-04-24 1139ET

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