Today, we are facing an epochal change to retirement as we know it. There are eight key challenges we must confront.
First, according to the 2017 World Economic Forum (WEF) white paper “We’ll Live to 100: How Can We Afford It?” the global retirement savings gap is estimated to be a whopping 400 trillion dollars by 2050, growing by twenty-eight billion dollars for every day of the week! In other words, the rate that people are saving money relative to the amount of savings needed to sustain a comfortable retirement will not suffice.
Second, according to the WEF, the retirement age will have to increase to age seventy by the middle of the century. They have further stated that deficits in the pension systems in the developed nations will quadruple to 224 trillion dollars by 2050. They have warned: “The huge and spiralling costs […] imperil the incomes of future generations and set the industrial world up for the biggest pension crisis in history.”
Third, we are witnessing a tsunami of retirees. According to the American Association of Retired Persons (AARP), 10,000 baby boomers are turning age sixty-five every day, which is expected to continue to 2030 when the last of the baby boomers reach sixty-five.
Fourth, baby boomers are having to deal with supporting their aging parents while at the same time having to support their adult children. In addition, we are living longer, which means that retirees have to plan on saving more to avoid potentially seeing their retirement comfort dwindle as they get older.
According to the Pew Research Center,5 some 21% of Baby Boomers say their standard of living is lower than their parents’ was at the age they are now. Not only do boomers give their overall quality of life a lower rating than adults in other generations, they are more likely to worry that their incomes won’t keep up with inflation, despite the fact that boomers enjoy the highest incomes of any age group. What is perplexing is that there has been a general consensus that the baby boomer generation will be leaving substantial estates to their beneficiaries, more so than any generation before, yet many feel pessimistic about their financial future.
This contradiction may very well lie in the fact that the biggest asset owned by baby boomers is their home, so they discount the value of their home when they consider their future financial well-being, as they should. At the end of the day, they need a place to live, and they are living longer. In addition, studies indicate that by 2037, two-thirds of baby boomers’ homes will be flooding the market as they prepare for their next stage of life, which may create the unintended consequence of a sharp decline in home values.
Fifth, the COVID-19 pandemic has unquestionably added new challenges to retirement planning, all the more reason to be concerned that current investments are not appropriate. Even millennials who are decades from retiring are concerned about their future. According to a study named Millennial Investing, by Investopedia, affluent millennials concluded that they will have to work beyond the traditional age of retirement. Another conclusion, and one that I am very concerned about, is that, despite their higher incomes, millennials are reticent about investing in the stock market. Forty percent of those interviewed believe that investing is risky while 25 percent say it’s “overwhelming.” It appears that many millennials are following in the footsteps of their grandparents who were afraid to invest in the stock markets despite decades of proof that quality stocks provide excellent long-term returns.
Sixth, we are in a historically low interest rate environment. Rates of returns on investments that retirees typically hold, such as bonds, treasuries, and other deposit products, are abysmal. The notion that these investments are safe is becoming a myth for no other reason than the idea that not making any money is high risk. For example, today, treasuries which are often referred to as “a flight to safety” are paying a paltry 0.89 percent for a ten-year treasury and a yield of only 1.65 percent for a thirty-year treasury.
Over time, the effects of inflation and taxation on your investment portfolio can become extremely serious when it comes to your ability to retire comfortably. For example, a basket of goods that cost $100 just twenty years ago now (2020) costs $142.46, an increase of 42.46 percent. Unless your investments exceed inflation and taxation over time, you’re in danger of just getting by in retirement.
In addition, costs associated with retiring and especially those associated with retirement and long-term care facilities are over the top and continue to rise unabated, posing another financial risk that people have to prepare for.
The seventh challenge has to do with working after retirement. According to an article by Jessica Menton, published November 13, 2019, in USA Today, one in three Americans plan on having a job in retirement to prepare for a longer life, while 59 percent said they would keep working to make ends meet. Given the lack of savings, this is not a surprise, however, getting a job in retirement may not be a sure thing.
This comes on top of an existing risk posed by robotics, where many jobs, such as store greeter, cashier, and shelf restocker along with many other minimum-wage jobs that retirees count on, are vanishing.
The eighth challenge or observation, according to a study by Equitable Group, is that applications for reverse mortgages have more than tripled in the past year, and the reverse mortgage sector is expected to increase by 25 percent or more a year. The United States National Reverse Mortgage Lenders Association reports that approximately 6.5 trillion in home equity is tied up in reverse mortgages as of 2017, an all-time record.
A reverse mortgage is a loan where the homeowner can unlock a significant portion of equity based on the value of their home in exchange for a lump sum or monthly payments. There are no payments to be made by the homeowner, but the interest charges compound over time. The payments to the homeowner are tax free and the homeowner retains title of their residence. The entire loan becomes repayable when the borrower passes away, sells, or decides to move.
The fact that a considerably larger number of retirees are resorting to reverse mortgages underscores that many retirees have not saved enough, and things look even bleaker for pre-retirees.
The ninth challenge provides some good news. A recent Fidelity Investment study6 asked retirees and pre-retirees the following question: “Do you feel positive about how your life is/will be in retirement?” Pre-retirees with a written investment strategy felt more positive than those who did not have a plan, while 60 percent of retirees who had a plan felt more positive than those who did not.
The fact remains that the majority of investors do not have an effective written retirement and investment strategy. In my experience, some investors who do have a plan find them overly complicated and unreliable, often left collecting dust on the living room coffee table.