We talk a lot in this business about the retirement crisis, but I think that view is missing the big picture. What we are really facing as a society is the problem of longevity, and retirement is only part of that.
The simple fact is that many people are living much longer than in years past. In 1935 when the Social Security Act set the official retirement age at 65, the average life expectancy was only 61, which meant most people weren’t expecting to collect benefits for more than a few years, if at all.
Today the average is about 79 years old and in 2014, according to the Centers for Disease Control, there were more than 72,000 American over 100 years old. That was a 44% increase over 2000, and my guess is that the number is still higher today. But as our life expectancy has increased, as a society we haven’t adjusted our thinking around the issues that an older population faces.
A significant concern for many Americans as they get older, if they’ve thought about it at all, is the possibility of having to adjust their lifestyle to live on less — or even worse, running out of money. Add into the mix the uncertainties surrounding Social Security as well as the fact that, as the Pew Charitable Trust noted in a January 2016 report, more than 40% of workers don’t even have access to a retirement plan, making them less likely to have saved much at all. On top of that, many financial commentators have suggested that retirees will need $1 million or more to retire comfortably!
Another longevity issue that many have inadequate financial plans for is health care, with some experts saying retirees will need $250,000 or more just to meet medical expenses. Certainly the need for long-term care could wipe out a considerable portion of a couple’s nest egg if they haven’t properly planned for it.
Obviously there are serious financial issues that older Americans need to address. This can be an area of opportunity for advisors. With robo-advice increasingly turning picking stocks and bonds into a commodity, advisors should turn their attention to those skills that can’t be replicated by an algorithm, like providing advice and wise counsel to their clients well prior to retirement.
Isn’t that really the financial advisor’s stock-in-trade? Going forward, advisors should look to focus more on financial planning than on portfolio construction. Even the most sophisticated clients need help when it comes to areas like risk assessment or understanding the how and why of alternative investments.
A good financial plan can help a client see in black and white the importance of reducing spending and increasing saving now in order to be prepared for later. Too many Americans still think that if they’ve got Social Security and the equity in their homes, there’s nothing else to worry about. An advisor can help them understand whether or not those assumptions are reasonable, and help them come up with strategies to save more.
So really, what we call the retirement crisis is actually the much larger problem of not being prepared to live longer. For some people the solution may entail working longer, adjusting their spending and saving habits, and changing their investment mix. It’s going to require plans for post-retirement income, health care and long-term care insurance, lifestyle, residency. But whatever course of action might be best for any individual, a good financial plan developed with the help of his advisor will make it easier to carry out.