Why the old rules for retirement savings don’t work anymore

Times have changed and so have the rules for retirement. Get practical tips from Robert Merton.

30 Nov 2018

When it comes to planning for your retirement, there are many aspects to keep in mind. Most of us want those golden years to be filled with exciting events, a comfortable way of living and of course that health supports it. But, is there a right way to approach retirement?

Retirement used to be something with not a whole lot of variance to it; people entered the workforce in their 20’s, retired in their 60’s and lived another 10 years in retirement. Social security programs and pensions were well established and expected. But the world has changed. People are entering the workforce later, retiring later, living longer and the impact retirement has on people's well-being is different than it was before. The financial situation of most people has also changed, as individuals are less financially equipped to prepare for a retirement even when no social security program is guaranteed.

The conventional wisdom has been that people should have $1 million USD stashed away for when they want to retire. While that number may have seemed like a huge amount of money for most at one point, new data shows that it may no longer be sufficient. The average retirement age of 63 hasn’t changed but life expectancy has, sitting at about 85, meaning that you should plan to spend 22 years in retirement, according to CNBC.

There’s no free lunch. If it looks too good to be true, it’s probably not true.

– Merton

Nobel Laureate Robert C. Merton knows that times are changing fast. He’s a father of three and a professor of finance at MIT. Over the years, he has kept a close eye on financial developments around retirement and has had many financial conversations with the younger generation.

It can be broken down in simple terms and math. Because people live longer, 40 years of work that used to support 50 years of consumption now has to support 60 years. What does this mean for the average person?

“The arithmetic is equally simple,” says Merton. “Either, if you want to work the same number of years as your parents, you better live at a lower standard of living. If you’ve got the benefit of living longer, you’re going to work longer.”

“If I had one rule, one finance principle that I had to teach to every kid,” he says. “I would teach them there’s no free lunch. If it looks too good to be true, it’s probably not true.”

“There are a lot of good ways that we can do better at saving for retirement,” says Merton. “You shouldn’t have to get an education to try to figure out how to manage your portfolio. You should be educated to find someone to trust to do that.”

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Robert C. Merton

Nobel Laureate, 1997