What do we need pension plans for

Jesper Bo Jensen, Ph.d., Futurist / 21. nov 2017

Good friends asked me about advice 10 years ago. The woman didn’t have a pension plan and wanted to start it at 40. I calculated that she’d need to save up at least 25% of her salary every year until she retired if it was to have an effect. The result was that they rejected the model. Pension planning is easy to dismiss when you’re young and tough to start when you’re no longer young.

Saving and phases of life.
Let’s look at the challenges connected to saving up for a pension. Traditionally work life and family life started in the early 20s. Then came children and work for most of life until around 45 years of age, where you’d then have around 20 more years left on the job market before you could retire – with the social pension that is – for those who actually lived that long. Saving for your pension was a largely unknown concept back in the 60s except in parts of the public sector.

The new life phases
That’s all changed today and the life phases will change in the coming 20-30 years. That means that young and elderly are more in focus today because of changes to the life phases in the past 30-40 years. Childhood has shortened, youth lasts longer, family is made later and children are often not born until the woman is in her 30s. The first time mother today is 29.5 years old.

The free and young life continues until 30 today. People have their own place to live, live alone or in a relationship, are studying or working and often have few expenses and obligations. They still don’t have children and the degree of freedom is significant. They so to speak do themselves. Young people are far more often renting than they were 15-20 years ago. It’s quick to move to another city or country for a short period of time. In this phase of life, pension planning is unfathomable – unknown and unwanted. Young people only save for their pension if they’re forced by mandatory pension schemes.

Families with children
From 30 till 55 time and money are more locked. We buy houses, cars, strollers and pay into our pension plan. Old age is more tangible when we have kids. We’re no longer immortal. This phase lasts for quite a while in our lives. More women are having children after turning 40. Fertility for women over 40 is rising dramatically these years. We also see men who are doing a “second round” – new partner and a new set of kids – as fathers in the daycare.

That people are getting children later in life also means that the role as parent is taken more seriously than earlier. Parents have become amateurs and seek guidance on their children. This seriousness can also be transferred to pension planning, where most today know that this is the phase where you save up for later in life. Often the problem is though, that there isn’t much left when there needs to be money for all the necessities of a modern family with children.

Living the free senior-life
When the children have moved away from home, your allowance goes up and it’s not till you hit 70 that the clock really starts ticking down for old age. The reasons are of course better health, higher average age and longer educations. With the new phases of life, you’re both young and older for longer. The phase where you’re naturally thinking about pension planning is getting shorter, but is supplemented by a phase shortly before the retirement age where extraordinary savings and investment in old-age is highly interesting. When the kids move out, you can think about yourself again.

How much money do you need as a senior?
More than most think. The traditional advice of 60% of the highest salary earned doesn’t cut it. Private spending in Denmark rises with about 2.6% per year in actual values equivalent to a doubling in 27 years. So if you need 60% of what you had when you were 45 years old, you’d need double that at 70 to feel like you have the same wealth as earlier. Money is after all just a kind of points that show what the neighbor and other in society can afford in relation to us. When society becomes richer, more money is needed to hold your position. So you should actually try to have 120% of your paycheck when you’re 45 at 70.

It’s difficult with the current interest. Investment in stock and other areas are necessary, but always remember the risk. The higher the return, the higher the risk. Many will have to or want to supplement their pension payments with a few hours of work per week. That will probably also keep more of us alive, since it’s often healthy to keep occupied.

Don’t grow too old – it’s no fun running out of money. That also means that we need to consider how our pension is paid out to us. It’s nice living really well for 10 years, but a bit iffier for the 15 years after that when you’re only living off of the social pension.

Published here 2017

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