A powerful social development has been unfolding for quite some time that has had a major impact on the way a growing number of people are living their lives, including their financial lives. Interestingly, this powerful development has received almost no comment or attention, and its real impact appears poorly understood. I am referring to the parallel development of new stages of life and the lengthening of the last two stages of life.
A stage of life is age-related, but age is not the only driver. Each stage of life has a particular set of expectations, types of relationships, obligations, behaviors, and financial implications. For most of human history, the vast majority of people experienced three stages of life: 1) childhood, 2) adulthood and 3) decline, for those who lived to the point they could no longer work. For most, the period of decline was short, because all but the most affluent worked for as long as they possibly could, and medical care was not effective in keeping the old, sick, and frail alive for long.
Children moved into work roles at a rather young age, ending their education and starting to apprentice or doing jobs that they often would retain for the rest of their lives. They typically did what their same sex parent did. At a young age they were workers with the adult obligation to contribute financially to their household. Children ages eight and over were an economic benefit, not a cost. In 1810, in the United States, 2 million children worked between 50 and 70 hours a week. Federal child labor laws were not passed until 1918 and 1922, and even then were found unconstitutional by the Supreme Court. It was not until 1938 that a law was passed and not successfully challenged that prohibited people under the age of 16 from working during school hours.
Starting after 1900, especially with industrialization, there was a growth in the proportion of people who went to high school. In the year 1900, only 6% of 17-year-olds had graduated from high school! It did not reach 50% until 1940. (Now 90% of Americans are graduating high school.) The term “adolescence” was coined in 1904 to reflect the fact that a new stage of life was starting to develop, and an increasing proportion were not moving directly from childhood to adult work roles. Sixteen-year-olds wer not children, but were not adults, either.
After World War II, aided by the GI bill, there was an increase in the number of people who went to college, followed by an increase in the number of people who did not go right from college into adult roles. Today, a still increasing proportion who graduate college are putting off the obligations of career, marriage and parenthood. This is not all voluntary. Many have a hard time starting their careers, but the plain fact is that most Americans now do not go straight from adolescence into the roles associated with adulthood: stable work in the same field, marriage, mortgage, and children. There is a new stage of life. At Greenwald & Associates, we call it transadulthood: the transition to adulthood.
In 1940, when life expectancy at birth was 61 years, the average age of retirement was age 70. This is not a typo. It just indicates that many people worked as long as they could and basically never retired. But, after World War II, especially with the maturation of Social Security and the pension system, we saw the development of a new stage of life after adulthood. No longer did all but the most affluent work until they were physically unable. There was a reduction in the average age of leaving work, and many who were active and fully able to work retired. This was the start of the stage of “active retirement, ” which often lasts for more than two decades. Furthermore, according to studies Greenwald & Associates was involved with, there was a large spike during the 1990s in the proportion of Americans who saw retirement as a rewarding time of life.
Due to medical advances and other factors, we have seen the period of decline in a person’s life lengthened significantly for many. We are able to keep the healthy alive long enough to get sick or suffer a cognitive decline, and we are able to keep the sick and the cognitively impaired alive longer.
Thus, we have gone from three stages of life to six: childhood, adolescence, transadulthood, adulthood, active retirement and decline. Here is one way of visualizing it:
Importantly, significant earning only occurs in the adulthood stage—a declining proportion of the life course. Further, all the other stages have gotten more expensive and are primarily funded during the adult stage. There has been much discussion of the high cost of college (in the transadult stage) and of long-term care (in the decline stage), but the fact is that childhood, adolescence, and active retirement have also become more costly.
What does this development mean? The short answer is it means a lot. Our lives have become more variegated, more diverse, more interesting, more fulfilling, and, unfortunately, more costly.
This movement to six stages of life has made the basic concept of “saving for retirement” outmoded, especially for the Millennial generation and probably for Gen X. With the pre-adult stages of life becoming more expensive, the high debt that many Millennials are starting adulthood with, and the high education costs that many Gen Xers are helping their children with, it is increasingly hard for people to accumulate enough to fund the last two stages of life: active retirement and the decline period. Also, because these last stages are often so different, it is hard to summarize them with the one concept of “retirement.” It would be much more effective and efficient for people to plan for each post-work life stage separately. They should think first about how they want to live their active retirement stage, including when they want to start and what they think their expenses will be.
The decline stage presents a different challenge. Some never experience the decline stage. To some, the period is short and the expenses are low. For others, for example, those who develop Alzheimer’s disease, the cost can be very high. It is important to think clearly about how one wants to approach this uncertainty. Saving enough for the worst case scenario is impossible for most. Not protecting at all against some of the risks can be disastrous for some. There are insurance mechanisms that can provide protection against many of the risks in the decline stage, and more will be invented. The key point is to recognize there are two stages of life for many after the work years end. Incorporating this thinking into financial planning will lead to the most productive planning.
Bifurcating planning fits better into the way older people live their lives. It will lead to clearer thinking and better planning. The concept of one vague “retirement” period is now outdated, especially for Millennials, who will have to plan more effectively to get the financial security they desire.
The key conclusion is this: The typical life course has changed in this country. We have, in a relatively short period, doubled the number of life stages and increased the cost of each stage. We cannot expect former savings structures and planning systems to work in this new world, and therefore need new ways of visualizing retirement and new approaches to planning.