24 Apr At What Age Should You Retire?

At What Age Should You Retire?

President Macron’s controversial decision to sign France’s pension reform into law has not merely sparked widespread civil unrest within France but also stirred up international rhetoric around retirement. France’s move is nothing new. In fact, the UK ended fixed retirement in 2011, and raised their State Pension age to 66 in 2020, with an additional increase to 67 between 2026 and 2028. 

This is not surprising given the IMF indicates that population ageing has surpassed population growth in demographic change trends worldwide.

Rand Rescue takes a closer look.

Retirement age increasing worldwide

Most people dream of retiring early and enjoying their golden years without the stresses of work weighing on them. Such an undertaking is generally easier when you live in a first world nation as part of the middle- to upper classes.

For most people around the globe early retirement is prohibited by socio-economic factors, and yet retirement age has been increasing globally and most rapidly in developed countries.

Raising retirement age, especially for first world countries, may seem counterintuitive at first, but these decisions are driven by various factors such as workforce requirements, costs to government budget, population longevity and individual mortality.

Let’s take a look at the latter first.

Why is retirement age getting higher?

Numerous studies have been conducted to determine the link between mortality and retirement age – and most have produced the same conclusion: the later you retire, the longer you’ll live.

It should be noted that these studies didn’t focus on late retirement as a result of socio-economic need – such as people working into old age due to poverty – but focused on overall population with a broad range of socio-demographic samples.

The results are quite remarkable. One study published in J Epidemiol Community Health showed that a 1-year higher retirement age was associated with a 11% lower risk of all-cause mortality. The study sampled equal groups of healthy and unhealthy retirees in order to both compare and eliminate health factors in mortality and found that later retirement also decreased mortality rate for unhealthy retirees by 9%.

Similar results were published by the US Social Security Administration. Their data not only showed that later retirement decreased risk, but also that the groups which retired earliest have the highest risk of mortality. Another interesting finding was that the group which retired latest in the sample (age 65), had a far higher level of education than the group which retired earliest (age 62).

Population longevity

Population longevity differs from personal longevity/mortality in that it measures the overall lifespan of the entire population to calculate the mean mortality rate.

The UN’s Department of Economic Affairs indicates in their research that population ageing is a global phenomena which is seeing a rapid increase in longevity in virtually all countries in the world. Not only that, but this growth is accelerating.

2019 estimates indicated that we’re likely to see the number of older persons (65+) double to 1,5 billion in 2050. These estimates indicate that by 2050 persons aged 65 can expect to live 17 years longer than those aged 65 between 2015 and 2020. This is a massive increase in longevity.

Burden of population ageing on government budgets

While many countries have a variable retirement age, most impose a mandatory retirement age. Such mandatory age is also used to structure retirement and pension savings plans, with many funds imposing minimum and maximum ages for retiring from funds. Retiring from any pension schemes also reclassifies investments with new regulations applicable to the use of such funds post-retirement.

Although many people have personal retirement policies which they draw on retirement, most people around the globe rely on government grants to see them through.

For instance – retirement age in South Africa is set at a minimum of age 55 and maximum of age 65. Certain organisations impose a mandatory retirement age – currently enforced at the age of 60 for those involved in public service (government). While those in the private sector must adhere to the regulation imposed by their respective industries and companies – full time employment is capped at age 65 across the board.

Some people continue to provide services to companies after age 65 – as consultants, contractors and so forth – but such continued work has no bearing on the legislation applicable to their actual retirement savings.

The implication is that governments are compelled to budget and provide for any retirees within the scope of their socio-economic grants – and that this scope is ever-expanding.

We often hear of ‘shifting the goalpost’ but in the case of socio-economic budgeting, this goalpost is shifting organically.

Consider the stats noted in the previous section, for instance. If a government plans to support an individual post retirement at a minimum feasible monthly income over a set period, a 17-year time-span makes an enormous difference in how such grants are provisioned and estimated for. Add inflation to this, and it’s pretty clear that even the most affluent countries in the world cannot maintain their social grant systems at the same pace as population ageing.

Population ageing and post-retirement income

Population ageing has a significant impact on both the value of retirement savings at retirement and those strategies imposed by fund managers.

With life expectancy and cost of living both increasing rapidly, financial planners are finding it equally difficult to plan for the future. It doesn’t make sense to market the worst-case scenario to clients, and yet it’s becoming clear that most people are simply not saving enough for retirement. No financial provider will gain long-term clients by selling their worst-case scenario – and yet there is a greater onus on updating saving and investment models to cater for population ageing.

While certain retirement savings plans or policies ensure a certain income until death, others are structured according to the value of savings at retirement and/or restructured over different terms. Even those who followed the advice of their brokers decades ago may find themselves outliving their savings. By South African law, South Africans are required to reinvest a portion of their savings in an annuity. With the new two-pot pension system, the government hopes to coax citizens to invest in their pensions for other savings purposes as well – this means that citizens will be able to draw savings from their savings pot, and preserve their retirement money in the retirement pot.

As an incentive, many countries are offering citizens incentives for later retirement. In the UK, for instance, workers can defer claiming their State Pension which may see additional pension funds or lump sums added to their pension once they do claim.

Ageing population and workforce requirements

Retirement age is determined data which generally resembles normal distribution (the bell-shaped curve). While the algorithms do accommodate some variance, such variance is not in line with the shift in range, quartiles and median. A few decades ago, statisticians assumed that population growth would outpace population ageing – meaning that we’d see a greater boom in births and young workforces – but the actual outcome is proving to be a world where less people are having children and more people are dying later.

While later retirement is certainly most crucial for ensuring sufficient savings for old age, there are other factors to consider – such as the strain on a younger workforce given how many more older people they have to support compared to previous decades over the past century or so.

In Singapore, for instance, the statutory minimum retirement age is 62, and yet they have re-employment programs under their Retirement and Re-Employment Act which provides employment opportunities for retirees and requires that such workers be re-employed at least one year, with reconsideration each year until the age of 67. While employees can waive re-employment, employers who cannot re-employ such workers are required to make Employment Assistance Payments to the employee.

The impact on the workforce is not always just a matter of less hands, but also what those hands are skilled at. Rapid advancements in technology and the rise of new industries is seeing less young adults enter conventional workstreams and roles – this means that it’s also becoming harder to get the right man for the job.

We saw this trend in action when Eskom retrenched many of their older skilled workforce, only to recruit them back when they realised what they’d lost.

So what is the right age to retire?

It’s quite clear that retiring at a later age could have benefits for your health and retirement savings – but most people will certainly have a preference. Even so, there are numerous factors at play, such as the country of retirement, existing retirement vehicles and values, current age, health and job satisfaction.

If you live in South Africa, there is no mandatory retirement age unless you work for the government. That said – many companies have restrictions on employment age. You should, however, also consider the fund rules for your retirement vehicles as many of these require retirement or policy changes from a certain age. For those who wish to emigrate, age and fund type plays a big role. For instance – South Africans are allowed to withdraw once-off lump sum pension, provident or preservation fund amounts pre-retirement subject to withdrawal tax – these funds can then be transferred offshore. Post-retirement, individuals are allowed a once-off ⅓ lump sum withdrawal from a pension or pension preservation fund with the remainder to be invested in a life or living annuity (save for if the pension value is under R247 000 in which case it can be withdrawn in full).

Provident and provident preservation funds allow for full encashment of all savings accrued up until 28 February 2022. For the amount accrued from 1 March 2022, the ⅓ lump sum rule applies. The good news for South Africans abroad is that retirement annuities don’t generally allow early retirement for those living in SA, but if they’ve emigrated, they’re allowed to transfer the proceeds abroad before the age of 55. Thereafter the same ⅓ rule applies.

Where it gets tricky is the government’s changing the legislation to require South Africans moving abroad to lock their assets in SA for a period of 3 years post-emigration before they’re allowed to encash these products. This means that things can get quite tricky if you’re nearing 55.

Some countries offer great pension incentives for those who reinvest their offshore pensions in local schemes. If you’re still undecided on where you want to move, it’s good to consider which countries offer the best pension structures.

According to the Mercer CFA Institute Global Pension Index 2020, the Netherlands, Denmark, Israel, Australia, Finland, Sweden, Singapore, Norway, Canada and New Zealand are the top countries by pension ranking. The European Commission also added Iceland and the UK to their top rankings. While Iceland offers great benefits, these benefits are only fully accessible for those who’ve lived in the country for a minimum of 40 years. Iceland also imposes variable pensions based on income – if you earn an additional income to your pension, your pension will be reduced and can even be cancelled.

While Denmark imposes one of the highest pension eligibility ages at 70, but the country offers early retirement for people within 1 – 3 years of the public retirement age (67 – 69).

Essentially, choosing when to retire is very personal, but it will most definitely depend on how well you’ve saved and where your savings is kept.

Need help with your retirement savings?

If you’re considering emigration or have already moved abroad and need help in transferring or reinvesting your savings in your new home, feel free to leave your details below and we’ll get back to you to discuss your options.

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Sources:

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2. [WORKING PAPER] Waldron, H. “Links Between Early Retirement and Mortality.” 2001. USA Social Security – Office of Policy. ORES Working Paper No. 93. https://www.ssa.gov/policy/docs/workingpapers/wp93.html
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4. Bloom D.E. and Zucker, L.M. “Aging Is The Real Population Bomb”. 2023. International Monetary Fund. https://www.imf.org/en/Publications/fandd/issues/Series/Analytical-Series/aging-is-the-real-population-bomb-bloom-zucker
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6. [MEDIA STATEMENT] “Retirement Reform: Draft Legislation for the Two-Pot System” National Treasury of the Republic of South Africa. https://www.treasury.gov.za/comm_media/press/2022/2022073101%20Media%20Statement%20Two%20pots%20retirement%20reform%20proposals.pdf
7. “Best Countries For Pensions And Retirement”. 2023. Investopedia. https://www.investopedia.com/articles/personal-finance/042914/top-pension-systems-world.asp.
8. [DOWNLOAD] Whitehouse, E. “Earnings related schemes: Design options and experience”. World Bank. https://www.worldbank.org/content/dam/Worldbank/Event/pensions/3.%20Whitehouse_Basic%20pensionomics%20v5.pdf