The greatest financial security risk of an older adult's life may surprise you.
Hitting the golden 60s is often seen as the time to do what we want, when we want. The time when we are finally free to enjoy the fruits of our labor and live the life we have always wanted to live. Or is it? It looks like getting older these days is sadly not looking so golden anymore.
We spend most of our adult lives working so hard, only to increasingly find ourselves with hardly enough as our parents and grandparents downgrade their lifestyles. In fact, according to a recent report from Merrill Lynch and Age Wave, 54% of retirees feel like it is becoming harder for them financially in retirement than it was when they were working full time. A recent study by the Employee Benefit Research Institute found that more than half of baby boomers in the US are worried about outliving their savings.
The only appropriate word to describe the current situation is a crisis, and the severity of this crisis will depend on a combination of factors discussed below and also our responses to it - action is long overdue and needed now.
The world’s elderly population is growing dramatically.
TL;DR: There is a global trend where people are living longer, populations are aging rapidly, and the proportion of older people in populations is increasingly at an alarming rate, leading to a ticking demographic time bomb.
The world's aging population is growing and it's a global phenomenon.
1 in 6 people globally will be over 60 years old by 2030, and by then that demographic will increase to 1.4 billion from 1 billion in 2020.
By 2050, this age group will double and reach 2.1 billion, according to the World Health Organization, reflecting 22% of the world's population. (WHO)
In Japan, people over the age of 65 make up more than 26% of the total population. In Germany, they make up 21%; in Italy and Korea, 20%; in Australia and South Africa, 19%; in China and Spain 18%; in Britain 17%.
The pace of population aging is much faster than ever before in history.
It’s a challenge for many countries as well as societies and families—and one that will test individuals throughout their lives: how well we deal with it will have adirect impact on our future well-being as we grow older.
World population by age group, 1980-2050 (projected). Data Source: United Nations.
We live longer! Hooray! ...Wait, but that's the biggest financial challenge we are facing?!
TL;DR,: The prospect of living longer may be a daunting one if financial products do not adapt. Longer lives means more funding is needed to support ourselves through retirement. More than ever before we need to be financially smart.
So we all know that life expectancy is on the rise thanks to advancements in modern medicine etc. Many retirees are living longer than their parents did, and in many cases even the expectations for what we should be able to do at older ages are also changing. In fact, according to figures from the U.S. Social Security Administration (SSA), the average American lifespan has grown steadily over time and is currently about 82 years old—and this figure is expected to continue rising due to better health care conditions and advances in technology. The average life expectancy has increased by 50% over the past 50 years and is estimated to increase further in the future.
While this is great news for us, it also means that we will have a longer retirement period to fund.
How long will you live? How much money do you need to generate income for 30 or 40 years? And how can we make our money last? These are all questions that people should be asking themselves today—and they're especially relevant if we’re looking at a golden retirement in the decades ahead.
The growing gap between what people actually earn during their working years versus what they need after they retire is the single most important financial risk. Longevity is ranked as number 1 financial risk by The Center for Retirement Research at Boston College.
What it means for us is that we will need more savings in order to sustain our lifestyles, pay our expenses and to fulfill our dreams.
This uncertainty around life expectancy means that we need increasingly complex financial planning strategies when thinking about retirement.
What do volatile markets, inflation, potentially deteriorating health or just a simple desire to live with dignity and joy mean for older adults?
TL;DR,: Macroeconomic trends are really not in our favor. When you live on a fixed income, this really hurts our pockets. Most experts agree that a significant portion of the population will lack the resources to live comfortably after they stop working.
Macroeconomic trends are making it harder for many people to achieve financial security in their golden years. The thought of living on a fixed income and savings can certainly be scary in light of red-hot inflation pushing up prices for food, energy bills, rent or other housing expenses.
Rising costs combined with volatile markets this year have wiped many years worth of income off pension pots, according to a recent article by The Telegraph.
Virtually everyone has been impacted by volatile markets and inflation over the past decade or two, not just older people. But these forces have hit us especially hard as we get older because we have less time for our portfolios and savings accounts to recover from any losses. According to Fidelity Investments' most recent survey results released in April 2019, the average 401(k) balance among all participants decreased from $99K at year-end 2018 (a very good year) down towards $89K during mid-year 2019 mostly due to volatility. That's a significant drop off!
Another major factor affecting older adults is the cost of medical expenses.
As we get older, our health care needs increase. Interestingly, the recent research from the Center for Retirement Research at Boston College found that medical spending expectations don't change with age, meaning that older adults have tendencies to underestimate the actual costs they may incur. Deteriorating health and unexpected medical and long-term care expenses are a financial risk for all.
Finally, we all want to age with dignity and joy, and live our best lives! We want to go on holidays, spend time with friends, eat good food, buy gadgets, and keep our home in a good condition. Not being able to do that constitutes one of the major worries for older demographics.
How is the world responding to it?
People are coming back to work - “One in three pensioners is considering returning to work, as a worsening cost of living crisis and plunging stock markets have put retirements at risk”.
(Telegraph). In fact, a study by the Center for Retirement Research at Boston College found that nearly half of all retirees were forced to delay their retirement plans. But is working forever sustainable? At a certain age, that should be our choice, not something you do out of necessity.
How about 401(k)s and Pensions? Financial planners have long warned against putting all your eggs in one basket, but many Americans are living off their 401(k)s alone. A study by the Employee Benefit Research Institute found that only 17% of workers had saved enough money so they could live comfortably throughout retirement without having to dip into their savings to pay the bills. Many retirees don't have access to employer-based benefits such as pensions anymore according to a 2018 study by the U.S. Bureau of Labor Statistics.
Financial Institutions are not that helpful either. The financial system is not yet built for those who come off the ongoing income stream. Sadly the rejection rate amongst applicants above 60 years old is high: on a sample data set, older adults constituted 70% of total rejected applicants despite having accumulated enough assets.
Furthermore, in Spain around 650,000 signed a petition “to encourage banks to stop excluding older customers by closing branches and pushing vital transactions online”.
Senior citizens find themselves in a situation where either institutions are
too advanced (not to mention startups), or have legacy systems, hence do not have the same level of “experience” as millennials and younger generations get.
A shining silver FinTech opportunity!
This silver wave is in need of innovation, across products and processes. Clever businesses will provide the best choice, digital and analogue, for older customers.
The looming retirement crisis combined with the current barrier to financial products makes it imperative that older people have access to financial tools.
We need to see better services, greater product selection, more customer centric processes, and much more flexibility around lenders’ criteria that reflects that stage of life.
Planning for retirement has always been challenging because retirees face numerous risks and may not perceive them accurately.
We are facing a crisis, which will eventually affect all of us: people are at risk of outliving their savings. Social security is not enough, pension returns are volatile, whilst financing options are more limited as we age. That, combined with inflation and longer life expectancy, exposes our parents, grandparents, and eventually us all to a funding gap.
A more fundamental rethink is in order. In the latest waves of innovation, FinTech for older adults is not only a necessity, but a shining opportunity.
Anna Frankowska
