From the December 2008 issue of Research Magazine • Subscribe!

'A Financial Katrina'

Ken Dychtwald and I were originally supposed to get together in late September in Atlanta, at Charles Schwab's IMPACT 08 conference. Dychtwald was one of its stellar line-up of keynote speakers, which included author David McCullough and ex-Secretary of State Madeleine Albright.

Unlike those celebrities, however, Dychtwald's research on older Americans closely relates to the attendees' day job. In fact, his consulting firm, Age Wave, teamed up with Schwab to prepare a major study on retirement. With financial markets in turmoil, Dychtwald's teleconference on the study got so much interest nationwide that our meeting had to be cancelled.

---

Who: Ken Dychtwald, Ph.D., President and CEO, Age WaveWhere: The Library, Regency Hotel, 540 Park Avenue, New York, October 2, 2008 On the Menu: Dannon yogurt, and facing the challenge of a long retirement.

---

When we caught up a week later in New York, selling pressures only grew worse, prompting Dychtwald to repeat something I heard from many financial planners in Atlanta:

"For those who are nearing retirement, it's a tsunami," he says shaking his head. "A financial Katrina."

But Dychtwald also claims that the market collapse is not a thunderbolt coming from a blue sky. Rather, it merely makes an existing bad situation worse. His key point is that most Americans -- specifically, a substantial number in the 75 million-strong baby boom generation -- were unprepared for the challenges of their imminent retirement even before stock prices tumbled.

Radical Changes There is much talk about how technology and social attitudes have changed the way Americans grow up, learn and work. But in the three decades since Dychtwald began writing about aging, it is the way Americans retire that has changed most. He is convinced, moreover, that this is not the end, and that the Golden Years are about to be transformed even more dramatically.

"For hundreds, maybe thousands of years there never used to be any retirement," he says. People worked until they died and, by today's standards, they died pretty young. "When retirement was invented in the 1950s, it was supposed to last a few years and was meant to be a quiet time on a porch somewhere in Florida, drinking ice tea and playing shuffleboard."

But retirees kept living longer and getting more active, traveling, playing sports and doing quite well financially on their accumulated savings and Social Security. All of a sudden, by the 1970s, retirement began to be presented as something desirable in and of itself, and early retirement became a sign of a successful life.

"If I met you at an airport and you told me that you're 47 and already retired, I would congratulate you," laughs Dychtwald.

The myth of a happy life of leisure, however, was not a reality for most people. Dychtwald, who started out as a clinical psychologist, says that most financial planners who were painting this rosy picture never asked retirees whether they enjoyed their life. It turns out that study after study showed that retirees are actually bored out of their mind. On the other hand, truly successful people typically continue working well into their eighties.

Nowadays, you don't have to be a Rupert Murdoch or a Warren Buffett to want and to be able to work. The current generation of retirees is much healthier, more agile and engaged in life than their predecessors. They really want to work, asserts Dychtwald, either to keep doing what they did all their life or engaging in what is now called an encore career.

Their desire dovetails with processes underway in the workforce, says Dychtwald.

"Our culture is extremely youth-conscious," he notes. "A personnel manager would rather hire a twenty-something than a 58-year-old. But this is changing as baby boomers begin to retire and there are fewer workers to take their place."

Even worse, Dychtwald sees not just a numbers gap, but a skills gap emerging in the labor market. "When you have a nurse specializing in pediatric oncology, you can't replace her with somebody with two weeks of training."

Several years ago, an article on the subject that Dychtwald co-authored for the Harvard Business Review won the prestigious McKinsey award.

Not Enough Money to RetireWhat will inexorably push many boomers to work longer is economic reality or, more specifically, dire financial need. Boomers approaching retirement are looking to live, on average, 20 or more years beyond the age of 65. This should be a good thing. The problem is that financially the current crop of retirees could not be prepared worse for this prospect. While Social Security is running out of money and businesses no longer provide defined benefit pensions, many Americans are saving too little for their long retirement.

Dychtwald divides baby boomers roughly into three equal parts. One third are either well-off, have enough savings or benefit from union or government pensions. Another third will do alright if they keep working a little longer, since delaying retirement for only a few years could reduce substantially the amount of money needed for a prosperous retirement.

His concern centers on the bottom third, those who, studies show, have less than $10,000 net worth. "Three to four million elderly Americans are living below the poverty line now," he says. "What happens if this number rises to 25 million?"

The main reason why so many people find themselves in such a bind, says Dychtwald, is because most Americans don't know anything about money and don't understand financial planning. "By the time my kids graduated from high school they got plenty of classes in sex education, but they didn't learn the first thing about managing money," he fumes. "You can't have a functioning democracy when citizens can't figure out how to live within their means."

Crisis of Financial EducationThis brings us back to the current crisis. Dychtwald doesn't see Wall Street as the only culprit in the credit binge which underlies the financial market meltdown. Being aware that it takes more than one partner to tango, he blames the uneducated consumer as well as the government, which encouraged spending and completely forgot to focus Americans on such quintessential American virtues as thrift and prudence.

Ostensibly, the financial planning industry has a role to play in educating the public about money, but according to Dychtwald it has not lived up to its responsibilities. "The financial planning industry has soiled itself," he says, noting that the lack of trust that permeates society has been fully in evidence among financial advisors. He notes that 70 percent of Americans don't have a financial advisor, while those who do average three. And those with net worth in the seven figures have five.

"People just don't know whom to trust."

Unless financial markets right themselves, the financial Katrina which hit people's 401(k) accounts could have far-reaching implications for this generation of Americans. In the early 1970s, Dychtwald interviewed many people who were in their sixties and seventies at that time. "For all the calamities that generation endured," he notes, "the event that truly defined their lives was the Depression."

The poverty, the humiliation and the losses left an indelible stamp on an entire generation, so that they were, in fact, called Depression babies. They were extra cautious about spending money and never forgot to save "for the rainy day". Boomers, on the other hand, grew up amidst rising prosperity, a plethora of new gadgets and appliances and widespread use of credit to finance never-ending consumption.

In this regard, Dychtwald comes close to saying that the market meltdown could serve a positive function, changing attitudes toward money and introducing more realistic expectations. "Since the beginning of this crisis, I'm sure there have been many more conversations about retirement," asserts Dychtwald. "More substantive ones, too."

---

Alexei Bayer runs KAFAN FX Information Services, an economic consulting firm in New York; reach him at abayer@kafanfx.com. His monthly "Global Economy" column in Research has received an excellence award from the New York State Society of Certified Public Accountants for the past five years, 2004-2008.

Reprints Discuss this story
This is where the comments go.