Biggest threats to retirement security
If advisors need more reasons to impress upon clients the importance of careful — very, very careful — retirement planning, a new report just gave it to them.
Retirement security is facing serious threats and may be at a historic crossroads, according to Natixis Investment Manager's annual Global Retirement Index study.
Critical issues advisors should be tracking for clients in or facing retirement include:
· Monetary policy - "A decade of low yields has had a profound effect on retirement security," according to the Natixis report.
"Low interest rates are suppressing income for retirees," says David Lafferty, chief market strategist for Natixis. "It's a long-term transfer of wealth that punishes savers and rewards younger investors."
As a result, the study notes, retirees looking to generate income from retirement savings are now forced to annuitize assets at a time when interest rates have never been lower.
Many, if not most, retirees must live on less income than they anticipated and need to work longer, if they can. Those with pensions are cashing in their defined benefit pension funds and assuming investment and financial risks or investing in riskier assets with higher income potential but also the potential for higher losses.
"Staggering levels of public debt" are a threat to retirement security.
"The big challenge going forward will be how rate hikes are implemented," the study says. Higher rates will be a positive for retirees in the long run, but rapid rate hikes could slow growth and spike prices.
· Public debt - "Staggering levels of public debt" represent a potentially bigger threat to retirement security than the most recent financial crisis, according to the report.
"The problem is clear," the study states. "Policy makers have limited funds to work with. Retirement benefits, education and infrastructure must all vie for a share of the same revenues that fund both defense budgets and interest payments on public debt. As debt increases, the funding available for retirement benefits and other social services decreases."
· Demographics - "The math is simple, but the fundamentals have been eroding for decades," the study points out. "The success of public and private retirement systems depend on one key factor: The number of younger individuals paying into the system has to be large enough to support the number of people taking payments out of the system."
Old-age dependency ratios, or the number of those living in retirement being supported by 100 workers, are rising around the world, the study notes. In the United States, the ratio was 19 retirees for every100 workers in 1990. The ratio is estimated to increase 90% by 2050, climbing to over 36 workers, which isn't a good thing. "The higher the ratio," the report warns," the greater the burden on workers."
Options for the government are politically unpopular. It can raise the qualified retirement age, reduce retirement benefit payments or bring more young workers into the country by immigration.
The good news is that employers may begin to eliminate mandatory retirement ages, and institute proactive employment policies for seniors, helping to minimize the threat to retirement security.
Rising seal levels has emerged as a threat to retirees.
· Climate change - Who knew that watching the weather report would factor into retirement planning?
Damage caused by rising sea levels, droughts, floods, heat waves, and wildfires have emerged as significant threats to retirees, the report notes, especially those who live in densely populated coastal areas like Florida. In addition to physical danger, "property insurance costs are skyrocketing for homeowners in these areas," the report states.
"Scarcity of resources means higher costs," says Jens Peers, CIO of sustainable equities and fixed income for Natixis subsidiary Mirova.
How does the U.S. stack up?
Not great — just 16th overall, behind countries like Iceland, Ireland and Luxembourg.
"The U.S. is definitely under-punching its weight in term of retirement security," says Lafferty.
Three factors drag the U.S. rankings down, says Peers: an aging population, income inequality and "incredibly high health care costs."