A Wake-Up Call for the Financial Services Industry: Re-Inventing Financial Aging
Haas, Donald Ray, Generations
The financial services industry, that is, the group of professionals who concern themselves with advising people about what to do with their money, has been in a state of single-mindedness, focusing for the most part on the promulgation of asset accumulation.
Yet, the industry has all but overlooked an evolutionary change that has occurred-the burgeoning of die older population. Many in this age group, which includes the bulge that is the baby boomers, are now calling out to an almost deaf industry, saying, "We've accumulated a sizable amount of wealth. How do we best utilize it to enhance our many years of retirement?" The personal-finance challenges of retirement are today complicated by continuing inflation and concerns about the viability of Social security, inadequate funding for Medicare, and lack of education for employees by employers regarding proper investment allocations within qualified retirement plans such as 4-01(k) and 403(b) plans. Indeed, lack of knowledge about financial matters is a problem for large numbers of consumers-older people included.
The professionals within the financial services industry face an imminent challenge: First, they must understand this major change and its implications. Next, they must develop new concepts, services, and products to meet the financial management needs of the older population. Essential to this task will be establishing appropriate methods of communication with both their representatives in the field and consumers.
The challenge of dramatic change has of course affected every sector of economic life throughout U.S. history. An example is the challenge to the auto industry beginning in the 1960s posed by serious competition from foreign manufacturers. Today, the healthcare field is being rocked by challenges posed by the speed and extent of scientific and technological developments, rising costs, and major questions about healthcare delivery and payment modes. And all this as a new global marketplace emerges, with new economic powerhouses like China and the outsourcing of domestic jobs.
While change in any industry is certainly not a new phenomenon, the current rate of change is indeed unusual. The financial services industry must respond.
IMPLICATIONS OF POPULATION AGING FOR PROVISION OF FINANCIAL SERVICES
Current trends in extension of life and improvement in the quality of life for many older people have important implications for provision of aging services. For example, these days, any estimates of how long a person will live should not be based on life expectancy at birth. Certainly, for older people, these "at birth" numbers are grossly misleading.
Life expectancy in the United States, according to the National Vital Statistics Reports (2004), shows a newborn in the year 2000 on average having a life expectancy of 77.3 years. That same report shows a 7o-year-old at that same time with a life expectancy of 14.7 more years, or to age 84.7.
When President Roosevelt signed the original Social security law in 1935, the statistical reports stated that a newborn could expect to live 61.4 years. Statistically, then, by these data, a person born in 1935 or earlier should be dead today. But, of course, many individuals born in 1935 or earlier are still alive. Yet, the media and even some financial professionals still use life expectancy at birth as the guideline when planning for lifetime cash flow-obviously a major mistake.
A much better table to use to estimate life expectancy is the 2000 Annuity Mortality Table for individuals who have lived to at least age 65. A person who is 65 today can expect to live to his or her mid-8os. For a couple who are both age 65 today, the statistics show a fifty-fifty chance that at least one will live beyond age 90.
What are the implications for financial planning? First, living longer will require accumulation of more wealth to cover the cost of increased longevity, including costs of any future long-term care and, for example, any future costly improvements in healthcare. …