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New Solutions Needed For

The Retirement Tsunami

Seniors - Tropical IslandThe baby boomer generation (people born between 1946 and 1964) are now either retired or looking forward to retirement. Enjoying the fruits of their efforts and having the time to pursue their own interests.

In America alone, from now until 2024 10 000 people a day reach age 65 a total of 85 million.

In most cases, these will be challenging times as the world enters an unprecedented period. Named the “silver century” by the Japanese.

Statistically only 1 out of 100 people retire financially comfortable.  And only 5 out of 100 retire without relying on some external financial support.

Compounding the financial insecurity for this group will be:

  • Uncertain life expectancy
  •  The inability of governments to sustain retirement benefits
  • The economic consequences of the changing demographic
  • Future health expectation
  • Support they expect from their children
  • How much money they think they will need to last their lifetime.

This uncertainty has resulted in nearly three out of four baby boomers planning to work after age 65

For those who are approaching, or have passed, the significant milestone of 60 they’ve lived through some amazing times. The swinging 60’s, the Pill, mini skirts, fax machines, computers. the internet, the rise and fall of Communism in Europe, cell phones, the rise of China as an economic power plus many, many more.

But they now face an uncertain future and changes that will have an impact on their own lives – a changed lifestyle.

The rise in the proportion of the world’s old is the century’s defining demographic trend.

old coupleWhat are some of the likely consequences of this phenomenon?

  • Stock and property prices will fall. Over time pension funds will liquidate stocks and property to feed the cash needs of this group. Outflows will exceed inflows and prices will drop.
  • Governments will cut state sponsored social security and pension plans.
  • Medical, personal and household services firms will benefit. Aging baby boomers will transform certain industries, like education, travel, insurance, investment, health care and property development.
  • Population distributions will undergo radical changes. This year or next the proportion of people aged sixty or over will surpass the proportion of under-fives. According to the UN, the 427 million elderly (over 60) in the world today make up about 8.8 per cent of the total population.  By the year 2025, the population of elderly persons is likely to reach 1.2 billion, or 21.9 per cent of the total population.
  • The increasing number of retired and semi-retired will be compounded by extended life expectancy. Steven Austad, head of the department of biological sciences at the University of Idaho, has postulated that there is someone on earth today who will live to 150 with their cognitive abilities intact.
  • As we analyze the impending greying situation in our century, there emerges more interesting features. If we subdivide the elderly population in to “younger old” (those below 75 years) and “older old” (those above 75 years). Then analyse the composition of the elderly population, as it is likely to unfold in the next 25 years.

The “older old” will steadily swell in greater numbers than the “younger old”. It will mean that at the nation levels there will   be a growing number of “older old” folk to be taken care of, with all their related problems.

  • Traditional economic models will be invalid. In the US there are about 80 million baby boomers … over 25% of the population. Considering this one can understand the concern that the chairman of America’s Federal Reserve Board, Alan Greenspan, has about this situation. We will almost surely be unable to meet the demands on resources.
  • More people will depend on fewer people. This is reflected in the potential support ratio, or PSR (the number of persons aged 15-64 years per one older person aged 65 years or older), shows the dependency burden on workers. The impact of demographic aging is visible in the PSR, which has fallen and will continue to fall.

Between 1950 and 2000, the PSR fell from 12 to 9 people. By mid-century, the PSR is projected to fall to 4. But in some developed countries this ratio will drop as low as 1:1. Or one working age person to one person aged 65 or older!

  • It is likely that countries such as America and many Western European countries will not be able to afford the benefits that they have promised to retirees. Retirees will be forced to liquidate their assets. Creating added pressure on the stock and property markets.
  • freedomAs people live longer there will be more and more need for long term nursing care. This care is very expensive, is not covered by medical aid, and will be out of the financial reach of most people.
  • Many retirees will have to face the long-term impact of having defined contribution rather than a defined benefits pension schemes. As a result people may run out of money at an extremely critical time in their life.
  • With many people leaving, or being forced out, of formal employment there will be a growing shortage of traditional skills. These will have to be filled by the “silver generation”. Economies will need skilled leaders to sustain the economy and the growing population of unemployed and retired.
  • Living longer, means more living expenses. There will be more health and long-term care costs – costs that can quickly consume assets. Therefore in many cases there will be reduced, or no, inheritances.
  • This growing and complex market segment will require financial advisers with special expertise and knowledge. To fully understand the unique circumstances and conditions that will impact this group.

These circumstances will be aggravated with many other unknown factors, inflation, interest rates, the performance of the World economies,  stock market performance, currency instability, political uncertainties.

They may be further clouded by personal setbacks. A bad business decision. Retrenchment. Taking early retirement. Pension less than planned. Prices of secure housing for the over sixties being high.

These factors compound the uncertainty and risk.

The bottom line is that retirees are faced with crucial problems that have never been experienced before. So they will have to find new solutions.

Experts differ, of course, on that subject, but one, Laurence J. Kotlikoff, professor of economics at Boston University, presents a worst-case scenario. He thinks the future will be so bad that “we all need to start saving like crazy.”

In a new book written with Scott Burns, The Coming Generational Storm, he predicts government will deal with the costs of the aging population by printing more money. Leading to high inflation, interest rates, taxes and unemployment and reduced benefits.

But no matter how depressing these circumstances … they will create exceptional market opportunities.