Opinion: Sequence risk could tempt older people back to the office
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Traditionally at this time of year, Paul, a good friend of many years’ standing and I meet up for a new year beer when we can shoot the breeze, have a laugh and undertake to play golf together more frequently than we did in the previous twelve months. The tradition was continued earlier this week.
We’ve been doing this for more than two decades and every January, Paul spends at least 10-15 minutes complaining about work. And every year, my advice is: if you dislike it so much, why don’t you leave? His serial justifications for remaining where he is have been getting flimsier, but this week, he announced that he had taken the plunge and finally resigned from a job he had grown to hate.
“Why now,” I asked, delighted with his decision.
“Lockdown,” he replied, a period which had made him appreciate the value of his free time. He also decided that, even though he is triple-jabbed, by commuting into an office every day there was a chance he could be exposed to a new variant of Covid-19, so why take the risk.
“Will you get another job?” I enquired.
“Probably not,” he replied. “I cannot be bothered learning how to write computer code or trying to understand the machinations of social media and will definitely not miss the regular doses of woke nonsense that emanates from the personnel department.” I admire the way he continues to call HR the personnel department. “D’you know,” he concluded, shaking his head, “I’d just had enough.”
Paul is part of the nation’s ‘great retirement’ cohort, a body comprising tens of thousands of older workers (he’s 60) who have decided to leave the workforce on a permanent or semi-permanent basis. Over the course of the recent festive season, it’s almost certain that more folks have taken a similar decision and already handed in their notice.
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Older people are mature enough to make up their own mind about such matters, but there are potential consequences for an economy already having to cope with serious labour shortages.
Recently, the Office for National Statistics reported that there were 180,000 fewer over-50s in work than there were prior to the pandemic’s emergence. It transpires that thousands of older people didn’t bother returning to work once the furlough scheme ended.
If those people have built up a suitably-sized pension upon which they can live and they want to retire, then good luck to them. However, as life expectancy continues to rise, a sustained period of labour shortages will have social consequences, not least the cost of health and social care which, for many, will become unaffordable.
Should, or could, the ‘great retirement’ be reversed?
Since the turn of the century, large numbers of people have been increasingly content to work well into the 60s and 70s, but the pandemic has changed older folks’ attitudes.
Economists, concerned about a burgeoning labour shortage, argue that workplaces could be made more appealing to older workers with initiatives such as paid grandparental leave or regular sabbaticals – six-month breaks giving wannabe travellers the opportunity to get away. Perhaps the easiest move would be to ban mandatory retirement ages. If people wish to continue working, then let them.
Several suggestions could gain traction, but there’s another way of tempting older people back to the workplace: explain the meaning of sequence risk.
Sequence risk is defined as the risk that the order of investment returns on your pension or other savings will turn out unfavourable.
We’ve all seen straight-line charts showing how annual returns of say, 3.5% on a pension pot will enable the pot’s owner to draw 4.0% from their pension every year.
Online calculators consistently reassure someone with savings of £150,000 that they can withdraw £6,000 a year and enjoy annual increases of 1.5% plus investment returns of 3.5% and still have £42,368 remaining 30 years later.
Unfortunately, life doesn’t follow a straight line; it tends to be unpredictable as the pandemic and financial meltdown of 2008 have highlighted. These are not one-off incidents either and if one of them occurs early in retirement (sequence risk) and the value of your savings plummets, drawing a regular 4% could become a pipe dream.
Economists are right to suggest the workplace could become a more attractive place for older people, but the very real prospect that they will encounter some form of sequence risk during retirement should be sufficient to encourage people to work, even part-time, for as long as they can.