Ken Dychtwald: 75% of Households Could Face a Big Retirement Shock

They may have to work longer, move to lower cost housing, relocate, have multi-generations move in with them or perhaps have roommates and maybe give up some of their bucket list. [In sum], they’ll need to find ways to feel nourished and have a meaningful life without spending so much money.

What else could pre-retirees do to help themselves?

People will contemplate [buying] annuities. If they’re worried about winding up as a burden to others, this is an insurance track that will guarantee them a paycheck for life. People feel a sense of accountability when they get a certain amount each week or month rather than receiving [money] in a lump sum.

What’s wrong with getting a lump sum?

It makes people nervous because they don’t know how much they can afford to use. But a paycheck, of sorts, resembles what it was like when they were actively earning a living.

Are pre-retirees all of a sudden going to be financially savvy enough to make these critical decisions? Most haven’t been so sharp about their finances up till now, and you write that only 26% of Americans have financial advisors.

Most people are confused. Many financial firms are only interested in the high-net-worth individual, though a lot of them are starting to realize they need to do a better job of helping common folks, not just the affluent. Edward Jones, for example, views itself as a Main Street firm, not a Wall Street firm. Edelman Financial Engines is also trying to be more accessible for the general population. I think you’re going to see more and more of that.

What responsibility do FAs have to advise clients of the extent of health care costs in retirement and to factor those into their planning?

If you claim to be able to tell a client that there are things to be concerned about in your financial future and you leave out health costs because you’re not fully schooled in the subject, that’s irresponsible. You’re not doing your job, and one day you’re going to be liable. In our study with Edward Jones [released in August], we found that pre-retirees’ and retirees’ greatest financial worry was health and long-term care costs.

Why don’t FAs try to help clients more about those expenses?

Most financial advisors aren’t educated about [them] to the extent that they can give counsel. That’s unfortunate, especially since people have lived with a bit of a fairy tale that somehow they won’t have out-of-pocket health care costs in their later years and won’t ever need long-term care. So, they [figure] that they really don’t need to think about savings and preparation.

Amid the pandemic, how are various age cohorts faring financially?

Surprisingly, retirees have been least negatively impacted because they have the safety nets of Social Security and Medicare. And they no longer have mortgages to pay. So while retirees are more vulnerable to the coronavirus illness, financially they’re more fortified and secure than people 10 or 30 years in front of retirement.

How are pre-retirees ages 59 to 65 doing financially?

They’re getting the wind knocked out of them because the majority weren’t sufficiently prepared before coronavirus — they hadn’t saved enough to begin with. And now, in what should be the peak of their earning years, there’s growing uncertainty about work, worry about the cost of retirement, and frailty within families. A lot of middle-aged people are finding themselves short on cash, very unprepared for stopping work and struggling to pay bills.

What about younger people — Gen X, millennials and Gen Z?

There are long-term potential negative impacts of the pandemic for them because many are putting retirement planning off to the side while they try to just get through this year. Thirty- and 40-year-olds — about 20 million Americans — have stopped making contributions to savings programs. They’re saying, “I need the money to pay my rent. I don’t know if I’ll even live long enough to retire. I’ll worry about that later.”

Are they finding it hard to cope psychologically, too?

A lot of young people have no point of view about the pandemic other than fear and anger — [Gen Z’s and millennials’] mental health problems are going through the roof.

Your study conducted with Edward Jones finds that women have a greater need than men for financial planning before and during retirement. Please explain why.

First, a woman is paid less than a man — 82% for the same work. During her lifetime, that adds up to a $400,000-plus differential. That was a shocker for us. There’s not only that wage gap but also a health gap and a caregiving gap that women encounter.

Why hasn’t a light been shined on all that previously?

The financial industry has been overwhelmingly male-oriented. They need to snap out of it and realize that in the years to come, women are, increasingly, going to be the key earners and the responsible partners. Women have different challenges from men that need to be thought out and dealt with by financial professionals.

Your study looks at “The Four Pillars of the New Retirement” that make a good life.  Which did respondents consider the most important?

Financial people will have you believe that what matters most to people are finances. But we found that what matters more are people’s relationships, their health and whether they have a purpose in life. You can be a billionaire and feel miserable; but can have very little financial resources and still have a meaningful, purposeful life.

— Related on ThinkAdvisor:

• Older Americans Coping Better With Pandemic Than Younger Ones: Age Wave
• Ken Dychtwald: Pandemic Will Force Big Changes in Retirement Planning
• Wade Pfau: Pandemic Tears Up 4% Rule