Given the impact of the coronavirus pandemic, there’s a chance that in retirement, only 25% of all U.S. working households will be able to maintain their current standard of living unless they work longer, move to lower-cost housing and reduce many other expenditures, argues Ken Dychtwald, co-founder and CEO of Age Wave, in an interview with ThinkAdvisor.
Surprisingly, amid the virus, the cohort that has suffered financially the least is retirees: They’re fortified by the safety nets of Social Security and Medicare, notes Dychtwald, a psychologist and gerontologist.
Further, older people are psychologically coping with the pandemic better than Generation Z and millennials, whose “mental health problems are going through the roof,” according to Dychtwald, 70.
The bestselling author’s new book is “What Retirees Want: A Holistic View of Life’s Third Age,” co-written with Robert Morison (Wiley-July 2020).
Chapter 9 is especially pertinent under the circumstances. It is titled “Financial Longevity: Retirement is the Biggest Purchase of a Lifetime — That Many Can’t Afford.”
In the interview, Dychtwald discuses several ways to fund “the new” retirement, nearly all of which involve “course corrections” that require expense and spending reductions. He expects, however, that pre-retirees will buy annuities for the insurance contracts’ lifetime guaranteed payments.
Dychtwald launched Age Wave when, sparked by the trend of increased longevity, he bet that the focus would shift from younger consumers to the needs of baby boomers and the so-called silent generation, who preceded them.
Helping companies and governments serve the growing aging population, the firm’s clients include Allianz, Bank of America, Charles Schwab and Merrill Lynch.
Last month Age Wave and Edward Jones, in partnership, released an in-depth study: “The Four Pillars of the New Retirement,” which surveyed 9,000 people in the U.S. and Canada.
In the interview, Dychtwald reveals some of the study’s key findings, including pre-retirees’ and retirees’ biggest financial worry.
ThinkAdvisor interviewed Dychtwald on Aug. 26. Speaking from Orinda, California, where Age Wave is based, he noted that the five-generation survey kicked off in November 2019. However, when the coronavirus pandemic took hold a few months later, Age Wave halted the investigation.
“But Edward Jones said, ‘Let’s do it because there’s never been a more important time to know what people are frightened about and what they’re hoping for.’ So,” Dychtwald says, “we rewrote the questions and went back in.”
Here are highlight of our interview:
THINKADVISOR: Half of all U.S. working households are “at risk of being unable to maintain their standard of living” and lifestyle in retirement, according to a 2018 study by the Center for Retirement Research at Boston College that you cite in your book. Given the pandemic’s impact, what would you estimate that figure to be now?
KEN DYCHTWALD: My guess is that probably 25% has the financial wherewithal unless they “course correct” by working longer, not continue to live in the same home and reduce their expenditures.
Americans’ monthly savings rate has risen during the pandemic. However, in 2019 the annual rate was only 7.6% of income. How does that lack of savings affect retirement planning?
As they approach retirement, many baby boomers are simply finding themselves unprepared. During their lives, they’ve spent more than they should have and unfortunately, never saved for a rainy day. Guess what? It’s raining.
Is there more leakage of 401(k) plans now?
I imagine that people who had been saving to put their kids through college but have lost their job and have a rent payment due might be breaking into their 401(k) accounts to handle the emergency. And I wouldn’t be surprised if those numbers are large. The long-term impacts of people cutting into their nest egg are going to be felt for decades.
People no longer have a “three-legged stool” for retirement: personal savings and retirement accounts, guaranteed employer pensions, and Social Security. Investors can’t rely on their portfolio to fund retirement, you write. Please elaborate.
A very small percentage of the American population has an employer paying for a pension, and savings rates have been scary low. We did a study right before the book came out that showed that 80% of the American public didn’t know how much money they’d need for retirement. That’s irresponsible.
But what about Social Security benefits?
Government programs are the only certain leg of the stool, but there’s speculation that these programs are going to be strained or even broken in the years to come.
So how are people supposed to fund their retirement?
If you can put your own personal pension together: a 401(k) plan, a 403(b) plan [and so on], you should, even if it hurts. But people are going to have to take a deep breath because the playing field has changed, and they’ll need to make some course corrections.