Yahoo recently posted an article about the oldest living person in the world, a smiling 116-year old great-great-grandmother living in a retirement home for the last 18 years. Her surviving children are 92 and 94. It made me think about the worst conversations we can ever have with a prospective client — those in which they are already retired, but do not have enough savings to maintain their lifestyle. Their golden years might not be as golden as they'd hoped.
Here's the great dilemma our nation is going to have to solve over the next decade: 10,000 Americans will reach the retirement age of 65 every day for the next 18 years. That's over 3.5 million Americans every year for the foreseeable future. Most are woefully unprepared to live for decades on their savings. What should we be doing about this impending crisis?
First some context. In the early 1900s, people typically died before reaching the current retirement age. In the 1930s, OASDI (old age, survivor and disability insurance, which became Social Security) was established and set the "retirement age" at 65, which was 107 percent of the actuarial life expectancy at that time. In addition, there were over 70 workers for every person receiving Social Security; today that number is around three workers for every recipient. That is why Social Security is considered by many to be functionally insolvent as it is currently constituted.
After World War II, pension plans became a growing part of the social contract that American businesses had with workers. In 1940, 15 percent of all private sector workers had a pension, and by 1980, that had swelled to over 45 percent (it was still 42 percent in 1990). Include government employees, and a majority of working Americans retired with predictable income in the form of pension coverage. Not only could workers count on income from a solvent pension plan for the rest of their lives, but they could also count on a backstop from the government should all else fail. Savings were used to enhance retirement for most workers until recently, when many started retiring with lump sum rollovers instead of guaranteed income streams. Our lives as advisers were relatively easy because most retiring clients were well-funded. Today, however, the world is forever changed and this has massive implications for us and for our clients. Consider the following:
1. Running out of time. Time is a depreciating asset and becomes a liability if not used wisely. The longer people procrastinate, the worse their alternatives will look. Unlike Australia, where workers are forced to saving 9 percent of their salary (and it is being expanded to 12 percent over the next few years), the U.S. simply assumes people will do the right thing. But most people do not like deferring certain pleasure today for an uncertain payoff in the distant future — this mindset leads to people waiting too long to start saving substantial amounts and ultimately being forced to work far longer than they might have expected.
2. Running out of money. How many people retire today with 20 to 30 times their annual spending in savings? The amount people need to save is probably far greater than many might believe. Two decades is a very long time to live on savings if you take into account paying taxes on income and capital gains and inflation-adjusted spending along the way. That means in order to catch up, many will choose to invest more in stocks, which increases uncertainty when they can least afford it.
3. Running out of choices. What happens when people are forced to use their retirement savings to support elderly parents or children who aren't self-sufficient, or pay for an unexpected expense? The day we retire we lose a huge amount of flexibility in adjusting to financial surprises. People will need professional guidance to understand their alternatives and the impact of their choices.
Unfortunately, while there are many new web-based firms to help people deal with these challenges, how many are part of a national firm that couples technology with experienced advisers to assist people? How does our society deal with this challenge? The system won't come to the rescue; unlike private citizens, our elected officials have lifetime income and health coverage provided by the government.
Quite simply, it's up to us. The independent financial advisers of America will have to help individuals understand the importance of their financial choices. It will be our job to tell them when they need to keep working and why they need to keep generating an income stream (even if it means doing consulting or working well into their 70s.) It's up to us to create an interactive and engaging way to help people with their financial decisions and to give them guidance to make smart choices. We will have to be the arbiters of truth.
The greatest success of the next decade in the financial industry will not be if you outperformed the market for your clients, but whether you improved your clients' lives by helping them make the right choices. We are going to have to be the solution if we want to ensure our fellow Americans thrive, should they one day end up being the oldest living person on the planet.
Joe Duran is chief executive of United Capital Private Wealth Counseling and the bestselling author of “The Money Code: Improve Your Entire Financial Life Right Now." Follow him @DuranMoney