For all the window dressing the financial-service industry can add to the process, it is possible to distill the essential issues in retirement planning to two, expressed as a ratio of working years to retirement years. This ratio does not produce an exact number for retirement, but it gives you a sense of the task at hand and how long you have to complete it. This ratio can also be quite instructive, particularly when placed in a historical context, because the numbers used to create it reflect significant demographic and economic trends that impact individuals.

Life Expectancy – Then and Now

A standard calculation of life expectancy is anticipated average lifespan at birth. According to geoba.se, a global statistics website, the current life expectancy for someone born today in the United States is 78.6 years; in 1935, the year Social Security was established, the life expectancy at birth for Americans was 59.9. While this seems like a dramatic improvement in longevity, using life expectancy at birth can be misleading.

There is strong evidence that improving at-birth longevity over the past 100 years is primarily due to the dramatic decline in infant deaths; because more people survived childhood, the overall averages have moved up. Further skewing the at-birth number is the fact that life expectancy improves with age; the longer you live, the more likely you are to live past your at-birth life expectancy. For example, a 25-year-old American male born in 1988 had a life expectancy at birth of 71.4 years. Using the Social Security Administration’s Life Expectancy Calculator, his life expectancy today is 82.0 years. If he lives to age 62, life expectancy increases to 86.2 years.

A more relevant life expectancy comparison is at age 65, because this group has lived long enough to need a retirement plan. While life-expectancy-at-65 numbers have improved steadily since the middle of the 20th century, the increase isn’t as significant as at-birth life expectancy.

Here’s a chart from the Social Security Administration (Table 1), showing the historical life expectancies of 65-year-old Americans at selected intervals since 1940:

Sixty-five (65) is an arbitrary retirement age (more on this later), but it is relevant when considering the life expectancies of retirees. A 65-year-old male in 1940 was projected to live 77.7 years. In 1990, the number was 80.3. Current data from the Social Security Administration estimates a man age 65 today can expect to live on average to age 84, a woman to age 86. The increase in longevity over the past 75 years is only seven years. (What is significant: a lot more people are reaching age 65.)

Working Years and Retirement Ages – Then and Now

A person who turned 65 in 1940 was born in 1875. For able-bodied Americans in this cohort, the majority of whom still lived on the farm or in rural communities, regular working life often started at age 15. High school and college graduates might have entered the workforce slightly later, but by age 20 most were working full time.

In the 1930s, the Committee on Economic Security (CES) observed that the prevailing retirement age for the few private and state pension plans in existence varied between age 65 and 70. After confirming with actuarial research that a government-run Social Security program could be made “self-sustaining with only modest levels of payroll taxation,” the CES chose 65 as the age workers would be eligible for full benefits. Based on the CES decision, a typical American retiring in 1940 had worked 45–50 years (from age 15–20 to age 65).

Since then, a variety of factors has led to a later start date for successive generations of Americans beginning their working years. The high school diploma became the minimum standard for a “basic education.” Government assistance allowed more people to pursue college degrees, which also meant later entry into the workforce. In recent years, stagnant economic conditions have made it harder for willing workers to secure full-time work. A Georgetown University study “found that on average, young workers are now 30 years old when they first earn a median-wage income of about $42,000, up from 26 years old in 1980” (Wall Street Journal, September 30, 2013).

At the same time, the average retirement age declined from 1940 to about 1990, and has only recently begun to climb. Amy Langfield, in a May 16, 2013 article for cnbc.com, cited the following statistics from a recent Gallup survey:

• The average US retirement age has climbed to 61, up from 57 two decades ago.

• The average non-retired American now plans to retire at 66, up from 60 in 1995.

The Ratio – Then and Now

Some of these calculations are “back-of-a-napkin” numbers; they use simple math and broad assumptions. But consider the retirement ratios of four different generations of Americans that result:

Those born in 1875 were the first generation to receive Social Security, and part of a completely different economic era. The group born in 1925 represents the tail-end of the “greatest generation,” which enjoyed the post-World War II economic surge in America. The 1950 contingent comes from the heart of the Baby Boom generation. And the 1990 cohort is today’s college graduates, for whom an estimated retirement age is just a guess.

In this hypothetical assessment, a person born in 1875 had to work and save for 3.8 years to realize and pay for one year of retirement. In contrast, the individual born in 1925 worked just 1.6 years for every year of retirement—less than half as long. For later generations, it appears the ratio is climbing.

Some Broad Conclusions, Individual Applications

• Empirically, these ratios are plausible representations of the retirement realities for different generations. The 1925 generation greatly benefited from steady employment, generous pensions, proportionally higher Social Security payments and extended periods of economic prosperity. The combination of later workforce entry, uncertain employment, longer life expectancy, and diminishing government and employee benefits seems to point to longer working periods, and later retirements.

• Individuals may find it interesting to project their retirement plans by first considering what their own numbers look like. Given their family histories and personal health, how long do they expect to live? How long do they anticipate working? Do these projections result in a ratio in line with the broader numbers?

• Keep in mind that life expectancy is a median number; half of men age 65 today can expect to live past 84, and half of the women past 86. This means it might be prudent to be “above average” in the longevity department, at least for planning purposes. Ernst & Young Insurance and Actuarial Advisory Services has calculated that “One in four people age 65 will see their 96th birthday.”

• It is important to understand that personal choices can significantly adjust your ratio of working to retirement years. Clearly, forgoing a higher standard of living today to save more for retirement will lower the ratio. Accepting a lesser lifestyle in retirement may also move the ratio. The large numbers show trends, but you have quite a bit of control over the determination of your own work/retirement ratio.

• An awareness of one’s potential life expectancy and the necessity of providing either earnings or savings for the cost of living should prompt consideration of financial issues beyond mere retirement accumulation. An under-funded retirement can be overcome by working longer, but declining skills and failing health might undo this plan in an instant. Risk management, typically through life and disability insurance, is essential financial protection.

By Elozor Preil