How to Avoid a Financial Panic over Retirement
by Martin Gronemann
The biggest impact of Covid-19 on people’s financial wellbeing is not that money has become more digital. Nor is it nervousness about losing their job tomorrow.
It’s their longer-term financial uncertainty. Will I be ok when I go on retirement? What kind of support can I expect from the state? Do I need to work longer than I want to?
People are living longer but retiring sooner. Yet our research finds no shortage of confusion and anxiety as soon-to-be-retirees nervously eyeball their 401(k)s and dwindling savings. A year of layoffs and lockdowns has only added to this financial uncertainty.
“This generation is saving less, a habit that will only lead to more financial stress down the line.”
This anxiety is driven chiefly by two factors. First, the majority of the current generation entering early retirement are earning and saving less than previous generations – this is the first time that has happened in over century.
Second, at the root of their nervousness is a lack of financial literacy. My research suggests that people have precious little understanding of a pension system that is opaque and and increasingly impersonalized. Few know their financial or pension providers, leading to poor investment decisions and furthering their feelings of stress.
To break this vicious cycle requires greater scrutiny by providers and policymakers to understand the cultural nuances around how people – couples, families, etc. – think and talk about money, especially their retirement savings.
Studies show that people generally feel more adept at managing money in their hands now – so-called “fast money.” But when it comes to their money socked away for retirement – or “slow money” – it’s a black box. As one 68-year-old we interviewed put it, “I might be good at nuclear and atomic physics, but I simply do not understand my pension.”
Or consider a 2016 report in the UK that found that people expected their pension fund to generate roughly $17,000 a year on top of their state pensions. In fact, their current savings were not even a third of this expected income.
Making matters worse, this generation is saving less – in fact nearly half of all 30-and-40-year-olds are not saving adequately or at all – a habit that will only lead to more financial stress down the line.
COVID has compounded these problems, by making older generations feel even less in control over their money. A recent UK survey found that at least 13 percent of respondents are considering postponing retirement, due to COVID-related financial certainties.
The problem has not been tackled in any meaningful way by governments or the private sector. The solutions are complex but not insurmountable. First, we don’t teach younger generations how to manage their finances or plan for retirement. Kids learn how to cook or kick a soccer ball but not how to balance a budget or make basic financial decisions later on in life. That needs to change.
Countries like the UK and Denmark have inculcated financial literacy into their school curricula. This is a helpful start that others should replicate. Yet more work is needed. Research conducted by my firm revealed what it takes to build kids’ financial intuition in a cashless society: we found, for example, that courses that teach financial literacy need to be fundamentally altered to become more experimental, iterative, consistent, and applied to the real money that kids use in their everyday lives.
Second, most pension providers do not focus on the human aspect of the services they provide – a glaring oversight that will become only more apparent as this current generation retires and seeks greater control over their retirement savings. Yet most of us have almost no relationship with our pension provider, much less understand how much will be waiting for us when we retire. Try Googling a question on retirement savings and you will be met with a faceless wall of words.
Unlike the aftermaths of previous panics – such as the 2008 financial crisis – the pandemic has left older generations feeling less in control when it comes to their overall financial well-being. When drugs aimed at older patients or retirees are rolled onto market with little scrutiny, this only adds to their feelings of financial anxiety.
After a year of lockdowns, layoffs, and financial uncertainty, the last thing people need to worry about these days is their retirement nest egg.
For more, see ReD Associates’ perspectives on finance.