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Living to 120 is becoming an imaginable prospect
(www.economist.com)
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this post was submitted on 01 Oct 2023
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Living that long would break the economy. I'm retired on a fixed income, and my planning was based on living no longer than age 90. After that, my savings will be depleted, I will live on social security alone. When I imagine young people having another 30 years to pay for social security per person, it's just broken. We would need to work until age 95 instead of 65. What would be the point?
We would not.
The extra amount you need as life expectancy increases diminishes with each extra year. E.g. let's assume (for each of calculation only; you can just scale it up linearly) that you need 10k/year on top of social security to live off in retirement. If your savings is 100k, and you only get a 5% return every year, you'll run out after about 15 years. Hence a typical lifetime annuity bought at age 65 will be around that in the US because it matches up with current US life expectancy (it won't deviate much elsewhere).
So that's for living to roughly 80. Here's how it'll play out as you approach 120:
85: ~20% more 90: ~38% more 95: ~52% more 100: ~62% more 105: ~70% more 110: ~77% more 115: ~82% more 120: ~86% more
As you can see, the curve flattens out. It flattens out because you're getting closer and closer to have sufficient money that the returns can sustain you perpetually (at a 5% return, which is pretty conservative, at $200k, you can perpetually take out $10k, and no further increase in life expectancy will change that).
Now, that of course is not in any way an insignificant increase, but if we assume 40 working years, $100k is about $850/year additional investment + compounding investment return at 5%. $186k is around $1550/year compounding.
But here's the thing, if you work 10 years longer, you grow it disproportionately much, because you delay starting to take money out, and you need less, while you get the compounding investment return of ten more years, and that drives down the yearly savings you need to make back down to around $850/year.
So an increase of 40 years of life expectancy "just" requires 10 more years of work to fully fund it assuming the same payment in during the later years. But here's the thing: Most people have far higher salaries towards the end of their careers, even inflation-adjusted, so most people would be able to fund 40 more years with far less than 10 extra years of work.
(Note that if you already were on track for your pensions to last you to 90, if you were pre-retirement now, you'd "only" need about 35% extra savings to have enough until 120, because you'd get returns from a higher base, so the extra savings or extra years of work needed over what you managed would be even lower)
These all work on averages btw. - due to differences in health, this is where we really want insurance/state pensions rather than relying on individual contributions.
This doesn't mean there aren't problems to deal with. Especially if the life expectancy grows fast enough that it "outpaces" peoples ability to adjust. But it's thankfully not quite as bad as having to add another 30 years of work.
Most of our financial advice for retirement has a hidden assumption that there is a large number of working age people helping not just social security, but also the stock market. A standard retirement portfolio will have a mix of t-bonds, stock market holdings, and a few other sectors.
We'd be looking at a scenario where there are a lot of small investors (a few million dollars is small on this scale), but proportionately fewer workers making use of that investment.
A US Millennial working today is going to need to be a 401k millionaire to retire with something comparable to their current standard of living. Most are going to fall short of that before we even talk about adding on extra life span.
The numbers I gave are entirely independent of social security. They presume a far below average stock market return. You're right they'll need to be a 401k millionaire, and per the numbers I gave, to achieve that will take around ~9k/year in pension investments if they intend to retire at 65. A lot obviously can not afford that, especially not early in their career, and will need to compensate accordingly later in their career to the extent they want.
But that wasn't really my point. My point is that the number of extra years - irrespective of your current pension situation - you need to work in order to maintain the same financial outlook is far lower than the number of additional years of retirement you can cover. Whether or not you're able to get to a sufficient pension level in the first place is a separate issue.
To how the stock market will fare, the big challenge there is whether or not automation will keep up or not, and frankly I think the biggest social upheaval over the next century will not be that it can't keep up, but that automation will outpace the proportional decline in the potential labour pool.
You might want to look at the Trinity Study of retirement portfolios. The general rate of withdrawal is lower than what you're quoting here. Closer to 4% or lower. Though this is giving way in some quarters to a sliding system, where you live it large in good return years, and frugaly in bad years.
But again, this all overlooks how that depends on a proportion of working people feeding stock market returns.
The general rate of withdrawal need to be lower if you have a portfolio that is very conservative. That may make sense when you're saving for you yourself and have a low risk tolerance, but it's not needed. That people feel worried enough to do that, though, is a good argument for insurance/state run pension schemes, because they an inherently pay out more since they can smooth out the risks and pay toward the maximum averaged returns.