GuidePost

The GRABot BAG
by Sherrie E. Grabot, CEO

September 2009
Excess baggage on the journey into retirement

On a recent summer evening in our corner of suburbia, one could hear the neighbors singing “Happy Birthday” as their daughter arrived home from the bus. The catch: she’s turning 26. Her brother, whom they also support financially, is 29. The parents themselves are on the edge of retirement.

This situation seems almost normal these days in California, where both unemployment and the cost of living are near record highs. However, it’s happening everywhere: a staggering proportion of retirees across America are supporting relatives in addition to providing for their own needs. This affects not just their retirement incomes, but perhaps our very concept of retirement planning as well.

Retirement: it takes a village
Everyone understands, at some level, that modern retirement is expensive. But the more we learn about it, the more costly it seems to become.

First, there’s simply the high cost of being retired. Remember when conventional wisdom held that 75% of today’s income should be adequate for retirement? Now we’d say 85% at a minimum, and many advisors would go up to 100%. Then there’s life expectancy, which has been gradually increasing over the years. Expect 20 years of retirement just to meet the average. If you want to live into your 90’s (and don’t we all?) plan on being able to pay for 30 years’ worth.

“Real life” is complicated
Finally, retirement can come with some hidden costs as well. The latest “Real Life Retirement” survey commissioned by Schwab reveals a particularly disturbing truth: 44% of retired Americans today are financially supporting at least one other individual other than a spouse. Of these, 53% are supporting an adult child and 37% support a grandchild. Plus,12% are also supporting one or more living parents.

The survey doesn’t offer historical data, so we don’t know if this is a recent development, perhaps caused or worsened by the recession. It could plausibly be a perennial retirement expense that’s somehow been overlooked by virtually everyone in the business. If it is a trend, it comes at a bad time. As a Schwab spokesman notes, somewhat dryly, “more and more retirees are finding themselves supporting family members and, simultaneously, witnessing portions of their hard-earned savings disappear.”

Bad news, good news
Just possibly, however, this news can be seen as a bad news/good news scenario. The bad news is abundantly clear. The good news is that all this bad news may serve as a wake-up call, changing some younger people’s attitudes about retirement and savings.

According to a new survey by Country Financial, 51% of younger Americans report that they are thinking more seriously about their own retirement after seeing what the recession has done to their parents’ nest eggs. No one would accuse this demographic of being overly optimistic. But unlike the retirement denial seen by some research, this sample does not believe that ‘it won’t happen to them’: fully 71% expect that an equally catastrophic recession will affect their retirement as well.

To confuse matters, 41% think it’s at least somewhat likely that they will have to support retired parents, too. (It would be interesting to know how many of these are the same kids who are being supported by Mom and Dad today.)

Sandwiched?
The concept of a “sandwich generation,” caught between caring for their children and parents at the same time, is already rather well-publicized. It’s typically identified only with the Baby Boom. But these results show that people now in retirement are often in the same position – and that those under 40 expect to be. Taken together, they sketch a more complex picture of how financial and retirement issues affect entire families at once.

Taking the liberty to speculate a bit, it seems likely that these multigenerational concerns are not a temporary affliction caused by a single event, or affecting a single generation. Instead, they may be the long-term norm.

A holistic approach
This would suggest a more holistic approach to retirement planning. Making calculations based on yourself and your spouse, and just maybe some college expenses, suddenly seems very limiting. With GuidedSavings we’ve always tried to incorporate as broad a financial perspective as possible, and thankfully the industry has headed in the direction of greater inclusiveness. But there are limits to what’s practical. Anticipating the interdependent financial resources and needs of half a dozen individuals will probably remain beyond them.

The only real alternative, as the Schwab study concludes, is to prepare for the unexpected. That would include the typical strategies for boosting your retirement savings: Make a realistic plan for how much you’ll need; save more, starting earlier; and consider a later retirement date.

The New Frugality
A more novel approach has been termed “the new frugality.” According to the Schwab research, 44% of retirees have recently become more conservative in their spending habits, and almost two-thirds of younger workers expect to do the same in retirement.

Most Americans these days are indeed more concerned about keeping their spending within their means. Does this represent a long-term change in attitudes, comparable to the mindset engendered in a previous generation by the Great Depression? (Which, by the way, also enforced financial dependence among families.) Or will future prosperity eventually bring back the consumption-focused, debt-driven lifestyles of the past decade?

It’s far too early to know. At the very least, the events of the last year or two should have opened the eyes of a broad demographic who had never experienced a really serious economic downturn. We hope they will allow for a little more complexity and uncertainty in their financial futures – and make plans accordingly.

~~ Sherrie

Did they listen?
The DOL recently dropped a rule that would have let retirement plan providers give advice regarding plans which included their own products. Citing concerns over conflict of interest, the EBSA is “taking a fresh look at the regulation that was issued and are working to bring it more closely in line with the [Pension Protection Act of 2006] statutory language.” This action helps ‘unfreeze’ a larger bundle of regulation designed to promote investment advice.

Earlier this year, our CEO Sherrie Grabot testified on this subject before a House committee. Her testimony stressed that while conflicts of interest are always a potential issue, by far the most important concern is to make quality advice widely and cheaply available as soon as possible. We’d like to think they listened.