The idea of retirement is changing and they way we will live into our senior years is undergoing a substantial social shift, right now, and right in front of us.
The traditional model is that we work our adult lives, for 40 to 50 years, and then at age 60 or 65 we stop working, entering into retirement. Retirement is an aspirational point where we have income, and the freedom to not have to go to work every day. The principles that led to the creation of this model have moved so comprehensively though that it is no longer either relevant or workable.
When the global retirement models were created, a worker would receive a pension for their retirement from age 65 or 70, depending on the country, but the average life expectancy was only about 61! The UK Old Age Pensions Act started in 1908, paying a pension from age 70. But it was not until 1954 that life expectancy exceeded age 70. That means that, contrary to what many people think about pensions being there to support everyone, they were originally designed as a safety net and not to be paid out to the masses.
A convergent trend in the last 20 years is that many people have moved to earlier retirement between ages 55 and 60 whilst at the same time life expectancy is increasing: now, depending on the country, it is around age 80. That means that a retirement income is now required to last anything up to 30 years.
Added to that we have a social demographic change. The world has an ageing population. Globally, the number of people age 60 and over is projected to double to more than 2 billion by 2050 according to a report in the Harvard Business Review with more people over the age of 60 than under the age of 5 for the first time. Why? Because of improvements in medicine and healthcare, as shown above we are living longer. And, the birth rate is dropping consistently in most countries of the world.
How does this impact my retirement?
It impacts it by rendering the traditional retirement pension models unworkable. To have a functional government supported pension, there need to be more people working and paying taxes, than there are in retirement drawing an income. Incomes typically increase throughout a worker’s career, so as many as eight new employees paying into a staff pension could be needed to fund a single retiree’s pension. With the age balance shifting there are now too many people at retirement relative to the fewer numbers working.
The trend in most countries of the world, and supported by the World Economic Forum, is to have a 3 pillar retirement income system.
There should be a government provided pension as an emergency measure only. They call this pillar one. The second pillar is your employer-provided pension scheme. You and your employer make contributions over time to create a pension for your future. This amount is usually not enough on its own though and as such there is a 3rd pillar: the self-funded pension. This is where everyone has the opportunity to make additional, voluntary and usually tax-deferred contributions to a personal pension or investment.
Complexities of being an Expat
If you are an expat, you not only need to think about how much you might need in retirement, when you would like to retire and the lifestyle you would like to lead, but also where you will retire, the currency you will be most likely to spend, the local laws and taxes there, and where your pension assets are held.
When we guide our international and expatriate clients about their retirement planning, we advocate flexibility. This is why we also like to include a pillar 4: that is a retirement focused investment structure that sits outside the formal pension structure of the country you are living in and alongside pillars 2 and 3. Being outside the pension system may reduce immediate tax deductions for the investments, but it will provide flexibility should your circumstances change and more portability to move it to another country without the rigid pension restrictions. Like all aspects of investment advice, what is right for one person is not necessarily right for the next, so you really do need specific and independent advice for you.
Some other issues facing expats and internationals in relation to managing pensions across countries are:
A big risk facing expats is the pension gap. This happens when you move between countries and have a period of your work life when you are not contributing to a pension structure such as extended parental leave, sabbatical or long-term illness. This can lead to an income shortfall in retirement.
You need to plan ahead and build a buffer for currency fluctuation if you are accruing pensions in different currencies. Particularly if your savings are locked into a pension scheme for many years and can’t be changed, even small movements in exchange rates could seriously affect your future retirement income.
A way to manage currency risk is to bring all your pensions together either in the accumulation phase or at retirement. Depending on the countries where your pensions are held though, this may or may not be possible. It’s a very important area for which to seek expert advice. For example, if you have ceased working, you can access your accumulated (not government provided) pensions from the UK at age 55, from the US at age 59 ½ , from Australia at age 60. In France the pension age is 60 whereas in the Netherlands the pension age is being pushed back from 65 to 67 over the next few years.
There are also rules around how much you can draw down, whether you can transfer it to another pension structure in another country, whether you can take a lump sum, and the impact of tax on each of these options. In short it can be complex.
We recommend that you get advice early on the complexities of your retirement planning as an international person.
One final comment is that the whole concept of retirement is also changing. It doesn’t necessarily mean never working again. Increasingly people at retirement are choosing to consult, or to work part time in a field where they have valuable experience or in a field they are passionate about. When you plan your retirement think about what you really want to do. If that includes some form of work it may also supplement your cost of living.
There is a lot to think about and plan around if you are an international person: start early and get professional independent advice. For more information you can contact us directly at [email protected].