For many Americans, building the financial assets to transition from daily work to retirement later in life stands apart as a top goal. The concept of retirement is deeply ingrained in today’s culture, but it’s actually a relatively new idea.
In 1900, the average global life expectancy was just 31 years. By 2017, that number jumped to 72.2 years, largely due to developments in modern medicine, sanitation, and work conditions. For most of human history, people had short lifespans and were expected to work until death. There was simply no driving societal need for retirement as we know it.
Modern-day retirement was necessitated and made possible through lengthening life spans, expanding prosperity, and population shifts tied to the Industrial Revolution. Interestingly, the concept of retirement started during the Roman Empire, eventually evolving into its current state.
One of the earliest records of retirement can be traced back to Roman Emperor Augustus. He instituted a pension program for a select group of Roman Legionnaires who had served 20 years in the military in 13 B.C. Financed by taxes, this early pension was an effort to ensure that retired soldiers would not rise up against the Roman empire. Other military pensions are scattered throughout history, usually conferred on victorious armies or navies by grateful monarchs. During this period, most elders depended on family care or alms from benefactors to survive as pensions were not widespread.
The Industrial Revolution shifted much of the population away from small family farms and villages to industrial and urban centers around factories and large cities. Various technological advances redefined the means of production and paved the way for mass-produced goods. Prosperity and life expectancy grew, but physically demanding jobs became harder to sustain with age. Farmers could pass demanding tasks to younger family members, but such transitions were not practical in factories, workshops, and mills.
In 1889, German Chancellor Otto von Bismarck developed our modern concept of retirement. To stave off an uprising by young unemployed Marxists, he decided to pay citizens aged 70 and older to leave the workforce voluntarily. “Those who are disabled from work by age and invalidity have a well-grounded claim to care from the state,” he said. This initiative created the idea of a set retirement age and widespread government payments to elderly individuals who elected to exit the workforce.
In the U.S., the private sector led the way for introducing retirement benefits. The first employee contribution plan was established in 1880 by the Baltimore & Ohio Railroad Company. They combined company contributions and employee salary deferral to generate future retirement benefits, giving both parties a stake in the process. The American Express Company established the first corporate pension in 1875. Over the years, pensions grew in popularity as a way for companies to reward long tenured loyal employees while simultaneously opening space to recruit a younger workforce.
By the 1920s, 84% of railroad workers were covered by a defined benefit plan. Railroad pension plans were the gold standard for retirement well into the 1930s. Some railroad pension plans even provided housing, like the Order of Railway Conductors retirement home, which was constructed in 1927 on Oatland Island in Savannah for retired train conductors.
Social and Employer Retirement Programs
The carnage of World War I, the Spanish Flu pandemic of 1918, the Wall Street crash of 1929, and the Great Depression upended the U.S. economy in the 20th century. Company-sponsored pension programs were cut as fast as people lost their jobs, creating an uneasy economic situation for older Americans.
In an effort to provide for elderly American workers, Franklin D. Roosevelt’s 1935 Social Security Act established retirement benefits at the federal level. When Social Security was originally conceived, the official retirement age was 65, but the average life expectancy for an American man was just 58. Over the years, the Social Security system expanded to include disability benefits as well as benefits for a worker’s children and spouses.
After World War II, the U.S. economy rebounded sharply, and pension benefit plans again grew in popularity as a vital employee recruitment and retention tool. By the 1950s, the popular image of a retirement filled with leisure activities, golf and sunshine was firmly planted in the American imagination.
The federal government began offering Medicare health benefits to older Americans in 1965 and made a huge step in 1978 by creating IRS code section 401(k). The creation of the 401(k) enabled employees to defer income taxes on funds directed into retirement accounts. Since their creation, 401(k)s have grown in popularity, with approximately three quarters of U.S. companies offering a 401(k) or similar plan today.
As 401(k) plans grew in popularity, traditional pension plans started to phase out by companies from coast to coast. By 2013, fewer than 10% of large U.S. companies offered the classic defined benefit pension to employees.
401(k) plans have given employees greater control over their retirement savings, but also transferred a greater responsibility. Employers often offer matching contributions, automatic enrollment, and retirement savings education to encourage employees participation. Employees and employers have benefited from 401(k) tax benefits. In recent years, the federal government has promoted financial health with additional benefits for retirement savings including Roth IRAs and Health Savings Accounts.
Life expectancy and time in retirement has continued to lengthen much longer than when the Social Security program first debuted in the 1930s. Since the long-term future of Social Security is uncertain, it’s more important than ever to take an active role in strategically planning for retirement.
The concept of retirement continues to develop in the United States, reflecting larger sociological trends. Today’s workers don’t necessarily want to retire and do nothing. A growing number of Americans are pursuing career shifts in their 50s or 60s away from highly compensated careers to “dream jobs.”
This career pivot may not produce as much income but instead prioritizes greater personal fulfillment and satisfaction. Many workers find such pursuits to be natural bridge from a high-stress, high-income career to an active and fulfilling semi-retirement doing something they love. The second career is meant to better align with their passions and values and to give their life purpose and meaning.
A more recent trend among a select few younger American workers is the method of “Financial Independence, Retire Early” or FIRE. The main premise is to save and invest extremely aggressively—somewhere between 50 to 75% of your income—in order to retire in your 30s or 40s. Those who are seeking FIRE always do three things: keep their expenses extremely low, make significant financial sacrifices early in their careers and increase their income as much as possible so they can achieve financial independence—good advice no matter what your goal.
Regardless of how our concept of retirement evolves over time, diligent planning is always a key component for success. Please reach out to our team if we can help you and your family plan for the future.