The Mistake Of A Lifetime

Human behavior is interesting.  Sometimes we get so anchored in our thinking that we miss the long-term big picture.  One of the best examples of this is our thinking about our financial decisions and age 65.  Conventional thinking is that retirees should have a radical change in how our retirement savings are invested when we celebrate our 65th birthday.  It is as if we should blow out the candles on the birthday cake, and then sell all our investments and buy bank CDs for a safe, secure and blissful retirement.    

For many years, age 65 was when we got our full Social Security retirement benefit.   And most employers provided pension plans for their employees, with age 65 as the common age for full retirement benefits.  For decades everyone has focused on age 65 as being some major point of financial decision-making.  .

Where did age 65 come from?  Germany.   Mitch Anthony writes in his book, The New Retire-Mentality, that the idea came from Chancellor Otto von Bismarck in the late 1800s, who wanted to provide an exit strategy for aging bureaucrats.  The original retirement age was 70, but was reduced to 65 because few lived long enough to collect benefits.  The life expectancy at the time was age 46.  When Social Security came along in 1935, we adopted the same retirement age; the life expectancy was age 63 at the time.

There are several implications here, but it is notable that the idea of retirement funds assumed that we would live for a relatively short period of time after retirement.  Hence, the conventional thinking became that when we retire, we put our nest egg in a jar and bury it in the back yard.

That thinking worked then; but it doesn’t work now.  Now our life expectancy is in the 80s, and soon will be in the 90s.  People will live 20-30 years after retirement!  Retirees are faced with 20-30 years of inflation and living even longer than 30 years.  The longevity risk and inflation risk is enormous over that period of time.

Even now, the financial industry is delivering new products, such as target-date funds and lifetime funds, which focus on age 65.  These new products appeal to our outdated thinking.  Why are so many of us planning “to” retirement rather than “through” retirement?