Aging Populations Lead to Slower Financial Growth | Woodbridge
09 06 2016
What the US’ Aging Population Means for Your Portfolio
The number of people over 80 will exceed those under the age of 5 within 15 years, and it’s going to wreak havoc on your portfolio – and the rest of the financial services food chain. Retired individuals have different needs and investing habits than their younger counterparts, and as this cohort takes up a larger section of the population pie, what it means to be “normal” will change.
This has substantial impacts on both advisors and investors. For the former, opportunities will be harder to come by, meaning they will need to work even harder to show their value and worth. Investors, similarly, will need to get used to a new normal where returns are muted and opportunities are more scarce.
According to recent research out of Credit Suisse, it’s not just about dollars saved – it’s also a shift in psychology.
Monetary policies have tried to overcome this hurdle by lowering interest rates – to the point of negativity in several cases – but to no avail. The aging population crisis will change everything about financial services in the next two decades.
What Will Happen
While expectations will certainly need to change, it isn’t all doom and gloom. For those who understand the market forces, opportunities will remain. Here’s what to expect:
Enhanced Longevity Risk
The pinch on portfolios will first be felt by the retired population, as they will be dealing with longevity risk – an increasingly long life expectancy. These extra golden years translate into dollars that need to literally last longer, which means the elderly need to either save more or live more humbly – or both.
Retirees by definition are no longer contributing to their portfolios. Rather, they are looking to maximize the potential of what they have while living of that same income. As we move to a situation where, we as a population, are spending more than saving, we will increasingly have less risk. It’s simple: those who are nearing or in retirement typically take on less risk, so as that population expands, so does that thinking.
With more investors taking on less risk, returns will be lower than they have historically been. Why? Because the biggest returns most often come from riskier investments like the stock market.
Just because people living longer doesn’t mean they are staying fully functional longer. As some may start to lose mental capacity, there will likely be regulation created to protect those not of sound mind. The government will want to make sure money managers are acting in the best interest of their clients, whether those clients know it or not. This year we saw the passing of the fiduciary rule, which could be the first of many similar legislations.
A Shift Away from Equities
While the default today, especially for the young, is to put your money in equities, this may not be the case for much longer. A new “default” will replace the S&P as the standard, but as gold, bonds, and other traditional safe haven assets haven’t been performing, it’s unclear what this new standard will be.
Questions About Active Management
With muted, less-risky returns coming to the forefront, it will be increasingly hard for active managers to shine. Couple that with the rise of sophisticated financial technology, and we’re likely to see an even greater turn toward passive management. Financial advisors will need to show their worth outside of the portfolio with personalized plans, constant check-ins, succession planning, and other human touches.
Natural Redistribution of Wealth
When market returns exceed market growth, the group of individuals invested in the market pulls ahead from the non-invested pack. With lower returns, the opposite will be true. Since many will be earning lesser returns than they would’ve in years past, the disparity between savers and non-savers will be less, creating a natural fiscal flattening of society.
What It Means for You
The entire world of financial services will be changing in the coming years, so pay close attention to how you seek returns. As more and more people look for safe ways to make income, these opportunities will become more difficult. As your financial advisor or product providers how they are grappling with these changes, and make plans on how you can stay ahead of the curve.
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