Before Tea Party leader Jim DeMint left the U.S. Senate to take a high-paying position as head of the conservative Heritage Foundation, the 61-year-old’s net worth was estimated to total $40,501 in 2010.
That figure was down 54% since 2004, according to a Washington Post report on the personal finances of lawmakers, and it may help explain why DeMint left the Senate to join the Heritage Foundation. For a man whose book, Now or Never: Saving America From Economic Collapse, criticizes Social Security as proof that the money spent by the federal government does not translate into positive results, DeMint must have been eager to find a way to self-fund his approaching retirement years.
“The fundamentally flawed program faces a severe demographic crisis as members of the baby boom generation begin to retire,” DeMint wrote. “The mess we face with Social Security, a program so many are now dependent upon, is yet another example of a failed progressive policy, where the potential for unintended consequences was ignored at the program’s inception.”
To be sure, baby boomer DeMint is not alone in facing a grim personal finance picture as he nears retirement age. The numbers tell the story: in 1900, Americans between the ages of 65 and 90 comprised a mere 6% of the U.S. population (see Census Bureau chart on left). But now, as baby boomers retire at the rate of 10,000 per day, people in that demographic embody a growing part of the population, and by 2050 are projected to comprise nearly 24% of the population.
More disturbing are the numbers that reflect boomers’ woeful undersaving for retirement as the economy struggles to gain its footing in a low-yield environment, as pointed out in a report published in December by asset management firm Manning & Napier, “Potential Macroeconomic Consequences of an Aging Population With Insufficient Savings.”
“Data provided by the Employee Benefit Research Institute shows that, excluding long-term care, a 65-year-old couple in 2012 (with median drug expenses) would need approximately $163,000 to have a 50% chance of meeting their medical expenses throughout retirement, and approximately $283,000 to have a 90% chance. A stunning 60% of workers have less than $25,000 in savings and investments, excluding their primary home and defined benefit plans, and 30% had under $1,000 in savings and investments,” says the Manning & Napier report.
To be sure, with the great wave of baby boomer retirement now begun in earnest, asset managers and retirement planners such as Manning & Napier are searching for ways to understand and deal with the vast problem of serving an aging population that has undersaved for retirement as yields on investments sit at historic lows and the debt-laden U.S. government attempts to spend less on Social Security and Medicare. And they're enlisting the help of advisors to solve it.
“Demographics, in a word, are on our minds,” wrote Wilmington Trust Investment Advisors in its 2013-2019 forecast published in December. The firm’s forecasters said that they were struck not only by the worldwide easy money policies and debt accumulation of recent years, but by the aging of populations in developed economies—and, in particular, by the graying of America.
‘We’ll Have Four Generations Around a Single Pocket of Wealth’
Summing up the demographic phenomenon at a press briefing in New York on Tuesday, Kathryn Karlic, Wilmington Trust’s group vice president of institutional investment management, identified it thus: “We’re living into our 80s, 90s and 100s. We’ll have four generations around a single pocket of wealth, with 80-year-old women taking care of their 100-year-old parents.”
Further identifying the issues around an aging population, Wilmington Trust’s forecasters predicted that the world’s citizens will change from accumulators of savings to consumers of savings, and that the U.S. may see fewer workers in the highly productive middle-age segment of the economy.
“With many fixed income securities offering low yields, Boomers are likely to keep more of their holdings in higher-risk assets in a bid to improve returns. Ultimately, however, they will be net securities sellers, a headwind to markets,” according to Wilmington Trust’s report.
Eminence grise John Bogle, senior chairman and founder of the Vanguard Group of mutual funds, further warns that underfunded pensions, flawed “thrift plans” purporting to be retirement plans, and the difficulty of earning a decent amount of investment income will collide in a train wreck unless action is taken quickly.
Bogle prescribes fixing Social Security by broadening the wage base, increasing the full retirement age to the late 60s, and indexing benefits to the consumer price index. Privatization, he said at AdvisorOne’s fifth annual Retirement Income Symposium last October in Boston, is “out of the question now,” while bringing the defined benefit system into the real world takes priority.
Advisors Up Their Game
Meanwhile, asset management giant BlackRock has recognized that the firm as well as plan sponsors play a critical role in bringing the defined contribution (DC) system of 401(k)s and target date funds to as many American workers as possible.
“It’s easy to find statistics about the retirement crisis in this country. Statistics miss the real point, however. These are real people we are trying to help, including our friends, families and neighbors,” writes Joseph Lee, head of advisor-sold DC distribution in introducing BlackRock’s new DC Edge quarterly publication for DC advisors. “But here is the great news: all of us, retirement plan specialists, platform partners and BlackRock team members, can help.”
DC Edge’s first edition, for example, explores the role that financial advisors can play in preparing Americans for retirement, with top advisors sharing tips for improving retirement readiness.
“Just a few years ago, ‘retirement readiness’ wouldn’t have been on the agenda when most DC plan sponsors met with their retirement consultants,” according to DC Edge. “It wasn’t that plan sponsors didn’t care about the ultimate retirement well-being of their participants; it was simply that the concept was outside the scope of DC plans. The focus was on investments, leaving the total retirement picture, including Social Security and traditional pensions, up to the individual participants to figure out.
The article goes on to quote Phil Fiore Jr. of the FDG Group at UBS Financial Services, who points to “a paradigm shift” in the way advisors and sponsors view retirement planning.
“We’ve got to move the needle very significantly over the next decade,” Fiore says. “If all we do is provide five-star rated funds but only 20% of our participants can retire with some minimal income replacement level, I think we will have failed.”
A Sea Change
Similarly, Russell Investments on Wednesday held a media briefing in New York to introduce its Retirement Lifestyle Solution tool, which is available only through financial advisors.
“Advisors are preparing for a sea change in their practices. Clients need more from them—more time, more advice, more reassurance they are on track with their savings, and more personalized portfolios," said Sandy Cavanaugh, chief executive for Russell's advisor-sold business, in a statement.
The solution offers a web-based “Retirement Lifestyle Planner” tool, along with a retirement income model strategy and an advisor support program.
But short of finding high-paying jobs at the end of their careers as Jim DeMint has done—an unlikely prospect for most American workers—many Baby Boomers face an uphill climb.
“At the broad asset class level, it is likely that there will continue to be demand for investment income as more and more people move into retirement,” Manning & Napier concludes in its report. “The demographic shift will keep yields down as more people need to save. Unfortunately, this search for yield has pushed nominal rates in many fixed income areas to the point where they do not provide much of a cushion against inflation. If investors continue to flock to these so-called safe assets, they are not going to earn a rate of return that will prepare them for retirement.”
On a more positive note, Manning & Napier says immigration and better productivity should help offset undersaving and the increased demand placed on government programs.
“Fortunately, all is not equal and birthrate is not the sole growth driver for the United States. Immigration and productivity growth have the potential to offset the economic drag created by the retiring baby boomers,” write Manning & Napier’s analysts. “Active management and investment flexibility will be the keys to successfully navigating the risks of an aging population.”
Read Bogle Warns Boomers on Coming Retirement Train Wreck at AdvisorOne.