OPINION | Retirement crisis: Millennials and Gen Zs can learn from Boomers' mistakes

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Photo: Getty Images
Photo: Getty Images

Data from 2018 shows that a South African with average annual national earnings would receive just 19% of that income in retirement. There's an opportunity here for current generations to learn from their predecessors and to change course, says Gareth Friedlander. 

Baby Boomers, the post-World War II generation born between 1946 and 1964, are entering retirement in their droves. They are doing so amidst a global longevity revolution as people the world over are living longer, healthier lives than before.

Moreover, two major socio-economic events have occurred towards the end of the Boomer’s savings journey: the 2008 global financial crisis; and the Covid-19 health and humanitarian crisis.

Both events have significantly impacted this generation’s retirement plans and are layered atop data which suggest their retirement savings behaviours may very well already have been inadequate.

Does this mean that the Baby Boomer generation could outlive their retirement savings? And what could future generations learn from the savings behaviours of this iconic cohort?

First, let’s delve into the global trends – Is there a Baby Boomer retirement crisis?

This demographic cohort is typically defined as those having been born during the economic recovery, and coinciding baby boom, following World War II.

Owing largely to the sheer size in numbers of the cohort, Baby Boomers have re-defined social norms at each of their major life stages. Now, as they begin entering retirement, there is growing concern globally that they will do so again. This time due to changes in savings behaviours that may precipitate a retirement savings crisis.

Notably, in the advanced economy of the United States, where over 76 million Americans are members of the cohort, current financial data paints a bleak picture for many Baby Boomer retirees.  

"Baby Boomers are largely unprepared for retirement: unrealistic in their expectations, and under-saved," research conducted by the Insured Retirement Institute has consistently shown.

Shift in savings

One of the principal transitions that has occurred in the US pension system during the lifespan of this generation has been a shift from defined benefit pension plans to defined contributions plans, with the latter placing a greater onus on employees to contribute and invest for their retirement.

This has resulted in this generation becoming one of the first to have to contend with the planning involved in saving on their own. But owing to a lack of inter-generational knowledge and the availability of information, many appear to have lacked the understanding of what it means to save for a longer life.

Compounding the challenge is the adverse savings impact of the ‘great recession’ caused by the 2008 global financial crisis. This scared many individuals out of the markets during the economic dip, meaning they missed out on the global market recovery. The March 2020 market contraction caused by the global outbreak of the Covid-19 pandemic worsened the situation while also further disrupting retirement trajectories.

These events and behaviours, alongside the low interest rate environments that followed, have made it difficult for many people to save sufficiently for retirement during their last years of employment.

Alarmingly, research from the Insured Retirement Institute, cited, for example, by Investopedia, has found that as many as 45% of Baby Boomers surveyed have no retirement savings.

Seven in 10 Baby Boomer workers (69%) either expect to or already are working past age 65 or do not plan to retire while the median savings in all household accounts is estimated at $152 000 – far short of the amount needed to live out retirement without assistance – according to the Transamerica Centre of Retirement Studies.

In a nutshell, In the US, "retirement wealth has not grown enough to keep pace with an aging population and other changes, and the shift from traditional pensions to individual savings has widened the retirement gap" according to the Economic Policy Institute.

What about South Africa?

While the retirement crisis in the US may seem distant, the reality is that the phenomenon observed there is playing out in many advanced nations across the globe, and locally too.  

Compounding poor savings behaviours, people are living far longer than ever before owing to rapid advances in the sciences of health and wellness. As people spend more time in retirement relative to their working careers, this longevity revolution is placing strain on pension systems globally.

By 2019, the World Economic Forum (WEF) estimated that retirees from six countries with advanced economies, such as the USA and the Netherlands, will outlive their savings by a full decade.

By comparison to advanced nations, South Africa’s aggregated retirement savings are likely to last far shorter.

According to Credit Suisse calculations based on OECD data, in 2018 a South African with average annual national earnings, would receive a pension that would make up just 19% of income when in retirement – known as the income replacement ratio.

Unsurprisingly, therefore, South Africans tend to be more pessimistic about whether they will have enough money to live on comfortably throughout their retirement years. The majority surveyed by Credit Suisse indicate that they are eithersomewhat or very insecure about this prospect.

As stated by National Treasury in a recent proposal to reform South Africa’s retirement system:

"South African households do not save sufficiently for retirement nor their short-to-medium-term needs," with the household savings average at just 2% above GDP. The result of this is that "replacement values at retirement are low".

As further noted in Treasury’s assessment of South Africa’s retirement system, South Africans "do not sufficiently insure their lives for the benefit of their dependants, nor insure properties in case of a loss".

The plight of this generation, while distressing, offers an opportunity for current generations, the Gen Xs, Zs and Millennials, to re-consider their pre-retirement situation and learn from their predecessors.

Foremost, it is crucial to start planning for your retirement, and for the financial security of your loved ones, as soon as possible. As people are living longer than ever before, this is becoming increasingly relevant.  

Furthermore, life insurance can offer an invaluable helping hand in supplementing funds in retirement. "Life insurance has increasingly become a tool to manage wealth over an individual’s lifetime," according to the Zurich Insurance Group.

In South Africa, there is some indication that Baby Boomers have taken to recognise this need. A 2019 study on the South African Insurance Gap by ASISA, for example, estimated that those aged over 50 are 3.6 times more likely to own a life insurance policy than those in their 20s.

The cohort is relatively well covered in the event of death or disability as compared to younger generations, where those below 30, for example, have a cover adequacy ratio of just 10% in the event of death. This implies that, in the event of death, households where the insured income earner is below 30 would only have 10% of the cover required to sustain its standard of living.

Clearly, many of us have something to learn from our elders when it comes to ensuring adequate insurance.

Life insurance doesn’t only offer financial protection to you and your family, through benefits that protect your income, for example, if you become disabled or severely ill. It can also reward you where you manage your health and wellness positively and don’t claim. 

A combination of income protection and timeous savings can go a long way to averting disaster. In this way, the inter-generational cycle of retirement crises, evidenced by the plight of the Baby Boomers, can hopefully end with this generation.

Gareth Friedlander is Deputy CEO of Discovery Life. News24 encourages freedom of speech and the expression of diverse views. The views of columnists published on News24 are therefore their own and do not necessarily represent the views of News24.

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