The concept of retirement has changed considerably in the last 143 years.

In 1881, Otto von Bismarck, the conservative president of Prussia, presented a revolutionary idea to the Reichstag – that the government should provide financial support to older members of society. In other words, a government sponsored retirement. The idea was radical because, back then, people simply didn’t retire. If you were alive, you probably worked on a farm; or if you were wealthier, you might have managed a farm or larger estate.

But von Bismarck was under pressure from socialist opponents to do better by the people, so he argued that “those who are disabled from work by age and invalidity have a well-grounded claim to receive care from the state.” It would take another eight years to bring this to fruition, but by the end of the decade the German government would create a retirement system which provided for citizens over the age of 70, if they lived that long. The qualifying age subsequently reduced to 65 in 1916.

In New Zealand, public pensions did not exist until 1898. At that time, the relatively small numbers of elderly pakeha were expected to provide for themselves or be supported by their families, and older Māori were supported in the traditional way by their whanau.

However, by the late 19th century the number of poor elderly in New Zealand were growing and this sparked vigorous political debate on the appropriate government response. This resulted in an Old Age Pension being introduced in 1898. Those aged 65 plus could apply but were subject to a rigorous means test that covered both income and assets.

At the time, of course, many potential pensioners did not make it to age 65, which meant the financial burden on the state was relatively modest. But by the turn of last century, demographic trends began changing, and what was seemingly smart politics in 1898 looks more problematic in 2024. 

In New Zealand today, if you reach the age of 65 in good health, on average you can expect to live another 23 years (male) to 25 years (female). This means von Bismark’s original idea of providing financial support in the unlikely event you lived long enough to need it, has become an increasingly heavy burden on western governments the world over. Particularly for those governments (like New Zealand’s) who have been slow to adjust their retirement systems in the face of a trend towards greater longevity. 

With people living so much longer these days, the whole notion of retirement has also changed. A vague plan might have been something like – work for 40-50 years, then have a retirement party, get a gold watch, and get ready for an exciting 25 years or so of golf.

Rather than jumping from full-time work into full-time retirement at age 65, the answer for many lies in planning more creatively for other options later in life. This could involve scaling work back to some degree (but not immediately to zero) or even changing careers around 55 or 60, but still working for another 15 or 20 years in some capacity.

If you can find a way to extend your working life by a decade or more, even with part-time work, you give your retirement savings that much longer to grow. It’s not uncommon for people to “retire” from jobs they dislike earlier than they thought financially possible. This can work wonders for your stress levels and quality of life, as long as the income from your substitute job is enough to cover regular expenses. 

Often, these ‘retirees’ can’t keep saving for their retirement fund to the same extent as before, but, more importantly, they won’t need to dip into their retirement nest egg either. Don’t underestimate the effect of another decade of compound growth on your investments at that point in your life – it’s incredibly powerful.

Today, retirement can be 25 to 30 years or more. And over that period, the likelihood that inflation eats away at your purchasing power is a much more serious threat. Based on a 3% annual inflation rate, the purchasing power of one dollar today reduces to just 50 cents after 23 years and to 40 cents after 30 years. This means the financial risk embedded in living a long and healthy retirement is that your savings are going to need to do more, and for longer.

The real financial risk is the potential for you to outlive your assets. That’s why rethinking your investment plans and your late-life workplans could form part of a practical new-age retirement solution that von Bismark could never have contemplated.

For many people, retirement is the light at the end of a tunnel called a career. How about flipping that paradigm on its head so that the end goal isn’t to stop doing the wrong kind of work, but to start doing the right kind of work?

With that mindset, just imagine how enjoyable those later working years could be. Or maybe that long-awaited retirement party and the gold watch will keep you satisfied for the next 25 years. And hey, there’s always golf, right?

Article by Damon O’Brien
Investment Director
Consilium