Retirement long held the cliched promise of staring idly at a calm lake on a beautiful day, from the comfort of a deck chair, a book in hand, seated by your loved one. In the modern version of this utopia, you probably have a computer on your lap, and a conf call going in one ear.
It is an illusion to stop working at 65. Life expectancy is higher, 50% of people might expect to live until 90 years old. Likelihood is that you’ll remain active for a long time after 65. This means that you’ll require a decent budget to do so, hence a revenue.
Assuming a yearly budget of $50k, you’ll need 5% annual return on $1m. With GenXers, born between 1965 and 1980, having an average balance on their 401k of $100k, this seems like a little stretch.
Those who count on their social security checks to bridge the gap might be up for a surprise. Everywhere, government pension spendings have become harder to shoulder. It is highly likely that the system will collapse on itself, or be forced to reduce coverage by the time all GenXers and their descendants retire. Basically, you are on your own.
Actually, not quite. While employers have veered away from Defined Benefit plans, which were too costly and fraught with fiduciary risks, they still back up Defined Contributions plans aka 401k in the US, which employer & employee contributions represented 5% of GDP in 2022. Not bad.
The other good news is that we’ll most probably be healthier at 65 than anybody has ever been before. Work has also got a lot more flexible, and somewhat less painful. Gone are the days when you were leaving your lifetime company with a watch on your wrist, feeling a little spent, after 40 good years of duty. White collar workers can certainly embrace various gigs from the age of 65 and beyond. Retry-hire is gradually replacing Retire.
These trends are actual opportunities for asset managers, such as:
Help reframe the debate on retirement. The word “retirement” is from a bygone period. A few factors are pushing for a renewed approach on retirement, which some people now call the “third life” or “yet-another phase in life”.
Increase saving habits among younger generations. GenX and GenZ are comparatively saving less
Develop hybrid products offering various payouts across defined contribution and defined benefits. One can also combine long “out-of-money” insurance contract to hedge against the tail-end of longevity.
Improve transparence of saving choices, with full disclosure on fees and expected outcomes
Extend asset management services to non-plan assets. Assets are often scattered across many accounts and providers, which hinders consolidated views and holistic long-term saving strategies.
Create incentives to reward the right attitude. Longevity means that assets are stickier for longer, and also means that health, wellness, and sustainability become front-of mind, influencing investment themes that investors care about.
Educate and create long-term relations. Nudge investors to save earlier and more. Automated saving allows to squirrel away the little you don’t spend on a recurring basis, while also facilitating Dollar Cost Averaging, which means that investments are made at different point in time and market valuation. DCA overcomes some of the mental blockers that most retail investors have e.g. “is it a good time to invest?”.
That’s all for now !
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Sources -
Retirement warning - FT
Retirement getting longer - The Economist
Why you should never retire - The Economist
Time to Rethink Retirement - Larry Fink Blackrock