Generational shift needed in retiree money management
The U.S. economic recovery, the longest in recorded history, has increased Americans’ wealth by US$52 trillion, according to the Federal Reserve. Wall Street is bursting with new money. U.S. stocks trade near record highs. Private equity firms search high and low for places to deploy more than US$1 trillion of investor cash. Banks, enjoying a glut of deposits, pay savers interest rates that are minuscule from an historic perspective.
All these riches should generate lots of economic activity. The well-off could be buying themselves little luxuries or doing something more productive, like starting new businesses or expanding old ones. Or they could donate more to charity. At the very least, the extra financial cushion should make Americans feel more secure.
If only. Many of the recovery’s biggest beneficiaries feel anxious. And financial advisers say even very rich clients often have a crippling reluctance to fully enjoy their money. “I am surprised how often I sit with a retired couple and have to encourage them to spend more,” says Liz Miller, president of Summit Place Financial Advisors, a New Jersey-based firm specializing in high- net-worth clients.
If well-off retirees are more frugal than necessary, they end up denying themselves the fruits of a lifetime of hard work. Their heirs eventually benefit, but the vitality of the American economy suffers. “Wealth is getting more and more concentrated among households that are averse to spending it,” says Matt Fellowes, a former Brookings Institution fellow who’s founder and chief executive officer of United Income, a retirement planning startup. “It’s trillions and trillions of wealth that is not benefiting anyone except asset managers.”
Americans’ combined net worth is US$109 trillion, according to the balance sheet for all individuals and charities tallied by the Fed each quarter. That’s up from less than US$57 trillion during the worst of the Great Recession 10 years ago. The money disproportionately flowed to the rich. Of course, some of these people have no problem spending their fortunes on luxury real estate, private jets, or generous philanthropy. Your more typical millionaire, though, is often tightfisted. Retirement experts and financial advisers disagree on exactly why.
Some caution with money is rational when there’s so much uncertainty about investment returns, medical costs, and longevity. “The reason they don’t spend in retirement is because they worry about running out of money,” says David Lau, founder and CEO of DPL Financial Partners. “You don’t know when someone is going to die, you don’t know when someone is going to get sick.”
Yet Miller says that even truly wealthy retirees, who have more than enough assets to cover any eventuality, often ignore her advice on what’s safe to spend. That’s even though she assures them her calculations are done with sophisticated planning software that can game out various scenarios, including living to 100 and severe market downturns such as the one in 2008. “They keep denying themselves today for fear of what could happen tomorrow,” she says.
“Collectively as a country we’re still saving not enough to accomplish retirement”
Many clients think they’re doing something wrong if they spend money in a way that causes portfolio balances to drop. “Never touch the principal” is classic advice that’s a relic of an era of double-digit interest rates, when even conservative investments could produce substantial income. Despite ultralow interest rates, advisers say it can be difficult to persuade retirees to tap savings rather than just live on their tiny bond coupons and dividend checks. “Wealth is really a source of identity for people,” Fellowes says. “By spending their wealth, they’re losing some of their identity. There’s an aversion to seeing their balances go down, even if it’s excess wealth” that they’ll never need.
Age is a crucial factor. The older people are, studies have found, the less risk they’ll take. And today’s wealth holders are older than the affluent of previous decades. The Fed’s most recent Survey of Consumer Finances, its comprehensive study of household wealth completed every three years, shows the typical U.S. household was poorer in 2016 than in 2007, adjusted for inflation. Only one age group saw its median net worth completely recover from the Great Recession in that time: families headed by someone 75 or older.
Even as some workers and retirees enjoy healthier nest eggs, millions of other Americans are struggling. “Affluent folks who are adequately prepared” often need to be encouraged to enjoy their retirement, says Marguerita Cheng, a financial planner at Blue Ocean Global Wealth in Gaithersburg, Md. Meanwhile, she adds, “there are people who are woefully ill-prepared for retirement. Perhaps they didn’t save enough, but job loss, illness, divorce, and family situations compounded an already precarious situation.”
While many current retirees can rely on defined-benefit pensions to produce income that supplements Social Security and protects against longevity risks, most future retirees won’t be so lucky. They’ll end their careers with just a 401(k) or other retirement account, a pot of money they need to make last. “Collectively as a country we’re still saving not enough to accomplish retirement,” says David Blanchett, head of retirement research for Morningstar Inc.’s Investment Management Group. “The question now is what comes next.”
Meanwhile, trillions of dollars sit in bank accounts and conservative investments that struggle to keep up with inflation. Corporations hold almost US$2 trillion in cash and buy back their own stock instead of making large capital investments. The rate of new business creation in the U.S. is stagnant. Individual giving as a percentage of disposable income has been roughly flat for more than a decade, according to the Giving USA Foundation, and it actually dropped 3.4 per cent last year in terms of inflation-adjusted dollars.
The biggest beneficiaries of the wealth generated over the past 10 years may be the children of the rich. The more conservatively their parents spend, the more they’ll inherit. There’s one complication, though: The gap in life expectancy between the average American and the wealthy and well-educated is growing. While longevity is flat and even falling for many in the U.S., the well-off can expect to live well into their 80s and 90s. In other words, if the next generation is waiting for an inheritance check, it could take quite a while to arrive.