by Ryan W. Smith
As the U.S. population ages, the likelihood of retirees outliving their retirement savings grows substantially. The long-term impact of the Great Recession of 2008 and 2009 devastated the accumulated wealth of these near-retirees, giving them very little time to financially recuperate even as the markets rebounded to new all-time highs.
Add to this the growing numbers of financial advisors who are planning to retire themselves and a potential toxic brew is boiling for near-retirees, says the Investment Management Consultants Association (IMCA) in a recent report detailing its yearly survey of 1,000+ members. The overall conclusion of the report’s authors is that the financial advisory industry needs to start focusing all conversations with existing and future clients on retirement planning.
The population of the U.S. is aging, in real terms, in an increasingly significant fashion. For example, the U.S. Census bureau estimates that half of the U.S. population will be over 45 years old by 2060. Along the way, the proportion of those Americans aged 65 and older will increase from 14.5 percent in 2014, to 16.9 percent in 2020, up to 20.6 percent in 2030.
According to IMCA’s report, these demographic realities will have a massive impact on the future of retirement in the United States for several reasons:
1) Late Start Equals Bad Finish
Some of these realities have already come to fruition, with the IMCA’s data showing that, currently, 92% of all investment advisory clients are over the age of 40, with over half of all clients over age 60. Additionally, while one-quarter of those in households headed by someone between 40 and 60 say retirement planning is their most important financial concern, there is no age-range where a majority feels planning for retirement is their greatest financial concern. Juxtaposed against the 53% of those in their 50s and 52% of those in their 60s who are most concerned with a comfortable standard of living in retirement, and it becomes apparent that Americans are not beginning to save for retirement while still young enough to get the long-term power of compounding to work in their favor.
2) No Time for Catching Up
Further cementing this late-start mentality, 80% of those in their 30s state that they view themselves as being behind in their retirement savings. That number dips slightly, to 67%, for those in their 40s, but 19% of those in their 40s say they do not know if they are behind. This is a cause for concern since only 2% in their 30s say the same. Alarmingly, 73% of those in their 50s and two-thirds of those in their 60s said they were behind in saving for retirement, with those respondents saying they didn’t know if they were behind falling back to 2% for those in their 50s and a negligible amount in their 60s saying they didn’t know if they were behind.
IMCA’s research clearly shows that by the time people reach their 60s, they know they are behind in saving for retirement and that they are aware they have already passed the prime accumulation periods of their late-20s and early-30s. This reality does not allow much time to compensate this lack of savings while also overcoming any investment mistakes or an overall market-related downturn before they actually retire.
3) It’s More Than a Formality
One way this lack of preparedness is showing up is that only one-half of all households headed by someone over age 30 have a legally articulated retirement income plan in writing. This illustrates the lack of focus on long-term planning, the report authors say, and will directly lead to later issues in funding living expenses in retirement.
By starting off all conversations with new clients and re-engaging existing clients by talking about long-term retirement goals and paths to reach those goals, many of the issues raised in the report could be avoided or greatly minimized.
One thing the report authors noted is that it appears that each new generation of employees shows a greater tendency to focus on short-term needs and not long-term goals. Financial advisors, the authors feel, are at the forefront in keeping the emphasis on long-term goals and can have the greatest impact when keeping retirement goals in focus.
4) Advisors are Running the Same Race
The financial advisory industry is also undergoing age-related issues. The average age for financial advisors in the U.S. is 50 and many advisors find themselves ready for retirement, along with many of their clients. Over one-sixth (17%) of advisors plan to retire within 5 years and over a third (36%) plan to leave their practice within 15 years. This presents an additional issue for advisory clients, already behind in their savings, when they are ready to retire and begin the draw-down of retirement accounts.
Moving to a new advisor can be a lengthy and costly process, and it appears that many clients are caught flat-footed when their advisors retire which means they are unprepared to begin the draw-down process with a new advisor. This impact is compounded due to only 39% of advisors having hired or groomed a successor to take over their advisory clients.
Technology can benefit advisors in numerous ways, assisting their successors and their clients looking at retirement planning with the long-term lens necessary for success. While some advisors will develop their own methodology for long-term planning, many other advisors will use calculators and widgets like AdvisoryWorld’s Monte Carlo simulation that can assist in forward-looking projections based on current allocations, historical returns and standard deviation information. Many of these programs, like AdvisoryWorld’s SCANalytics, will also allow for input of future cash flows, both deposit and withdrawals, to help paint a fuller picture of future considerations that clients and advisors need to consider in long-term planning.
One of the considerations necessary to account for is the Congressional Budget Office (CBO) recently revising its long-term outlook for Social Security. This move, lowering cost-of-living increases for future payouts, making it more important than ever for advisors and investors to focus on long-term retirement goals. The CBO recently noted that the “Old Age and Survivors Insurance” trust fund, what is commonly referred to as Social Security’s trust fund, will be fully exhausted by 2030. This will directly lead to a 31% reduction in Social Security benefits across-the-board by 2031, up sharply from the 21% reduction by 2034 that was mentioned earlier in 2016.
These long-term reductions in possible Social Security benefits will force ever-larger amounts of retirement to be self-funded, a goal that many Americans are just not prepared to cover. However, with proper planning, these increasingly necessary retirement goals can be met while also meeting some, if not all, short-term goals such as housing, vacations and educational expenses.