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Changing Demography to Force Big Shift in Retirement Planning

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Financial advisors are no strangers to changing demographics. Many are aging along with their client base and are well aware of the challenges for succession plans when they retire. But until that time, advisors need to understand how demographic changes are affecting the broader economy and financial markets as well as their own business.

“Demography is overwhelmingly the most important issue for the macro economy and capital markets in developed countries,” says Chris Brightman, chief investment officer of Research Affiliates.

He explains that population growth, which has been around 1% in the developed world, is declining. “Japan’s population has shrunk; Europe’s is near flat and in U.S [population] growth is now about 0.6% or 0.7% and will be 0.5% in the future,” Brightman tells ThinkAdvisor.

Slower population growth means slow economic growth simply because fewer people are working. That demographic along with an aging workforce, which tends to be less productive, is another bearish factor for the economy, says Brightman, noting that productivity peaks at age 50.

Given these two major demographic trends “getting back to 3% to 4% economic growth like we had in the ‘70s or ‘80s is never going to happen,” says Brightman.

For Mark Zandi, chief economist at Moody’s Analytics, the “biggest problem” for the U.S. economy going forward is not “unemployment but a lack of labor.” Indeed, the October jobs report released on Friday showed the unemployment rate falling to 5%, the lowest level in seven and a half years, and the labor participation rate unchanged at 62.4%, remaining at a 38-year low.  

In the near term this shortage of labor could boost wages, helping hourly workers and others at the lower end of the pay scale, but it could also hurt stocks, shrinking the profit margins of companies that have to pay steeper labor costs, says Zandi. Longer term, he says a shortage of workers could “exacerbate our fiscal problems” since fewer workers will be supporting a rising increasing number of retirees.

The 2015 Social Security Trustee’s report projects 2.6 workers contributing to Social Security per retiree by 2030, and just 2.2 if disability benefits are added in. In 2000 the figure was close to 4 workers per retiree.

Both Zandi and Brightman tell ThinkAdvisor that increasing immigration of skilled workers could help offset these demographic trends but admit that such a change in policy is not politically possible now. Longer term, however, Zandi says U.S. immigration policy could change because “businesses will start screaming and the political opposition will fade.”

Despite these pressures and slower future growth, both Zandi and Brightman are optimistic about financial markets and they are not concerned that retiring baby boomers withdrawing assets from their retirement accounts will harm markets.

U.S. stocks especially are a big drawer for investors outside the U.S., says Zandi. “As large populations in the rest of the world become wealthier they will want to own a piece of the U.S. stock market.”

And U.S. baby boomers, realizing they haven’t saved enough for retirement are trying to catch up, all buying assets at the same time, says Brightman. That has lowered the dividend yield of stocks to about 2% average from 4% 50, 100 and 150 years ago, and lowered bond yields. These lower yields, in turn, are sending a signal to baby boomers “to work a little longer, save a little more and maybe live more frugally in retirement than once hoped,” says Brightman.

For advisors these changing demographics suggest changes in services and fees relevant for different client populations.

Advisors need to learn about the psychology of older individuals and make sure clients have a support network, which bigger firms are well-positioned for, says Sophie Schmitt, senior analyst at Aite Group, an independent research and advisory firm.

Merrill Lynch, for example, has partnered with the USC Leonard Davis School of Gerontology to offer Ground-breaking Longevity Training Program for its financial advisors.

“All the big firms look at the MIT Age Lab” for guidance, says Schmitt. The lab’s website notes that “effective planning must be about more than financial security… must go beyond money, and adopt an integrated and holistic approach to helping people … prepare to live longer.”

For boomers, advisors need to “get better at penetrating their real financial lives … becoming the go-to-source for everything financial,” like United Capital’s life advisors,” says Schmitt.

Beyond those two demographic groups, are the millennials. “Firms need to be successful attracting millennials,” says Schmitt, adding that means moving away from asset-based charges since  millennials don’t have much in the way of assets to invest.

“You have to offer a fee-only approach to attract millennials who don’t have assets” charging a flat fee or monthly or hourly rates. She also suggests that advisors consider charging separately for planning advice and asset management.

Millennials may not have many investable assets now or even real estate but that could soon be changing. “In the very near term one of the key demographics will be the formation of millennial households,” says Zandi. “Today 3 .4 million more millennials are living with their parents than before the recession, but as wage growth picks up they will strike out on their own.” Zandi expects “strong household formation growth among millennials, which will drive a lot of economic activity, including spending on housing and other items

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