The COVID-19 pandemic has accelerated many trends that could affect the way you plan for and live in retirement, according to a recent Merrill Lynch Wealth Management webinar.
“The pandemic hasn't just changed our daily lives, said Andy Sieg, president of Merrill Lynch Wealth Management. “It's reshaping expectations for what the future may hold nearing in retirement.”
The good news: You can prepare for these trends and the new realities ahead. Here’s a recap of the topics discussed during the webinar.
Emerging Trends Reshape Retirement Planning
One trend, according to Ken Dychtwald, the co-founder of Age Wave, is that life expectancy is rising. According to a recent Centers for Disease Control and Prevention report, life expectancy for males age 65 is now 17.8 years and for females age 65, it's 20.4 years.
That has Americans asking how much those years will cost them and whether they can afford it, whether they have the resources necessary, said Dychtwald.
Another trend is that older Americans survived the COVID-19 pandemic much better than younger generations. They were resilient and expressed “a lot of gratitude for their lives,” according to Dychtwald’s research. Read The Four Ingredients to Living Well in the New Retirement.
A third trend, said Dychtwald, is that people are thinking about how their life can have more purpose in retirement. “It’s been a time when people have really missed the human connection,” said Dychtwald. “And so many people are thinking in their retirement they don't want to just sit around and watch TV, which is what a lot of people were doing before COVID and during COVID. People are dreaming of the trip they want to take, or how to spend more time with their kids or their good friends, or how to do something meaningful, how to use one's life to have more purpose in it. Those are big changes and I think that are probably good wake-up calls for people as they contemplate this next stage of life.”
With respect to purpose, Dychtwald also noted the following: “There's so much more we could be in our elder years. We could be leaders in our communities. We could be guides to our younger family members. We can help people across town who maybe could benefit from some of the skills and the emotional intelligence we've acquired. So, I think that the whole idea of finding a new purpose in retirement is more than just a nice thing to do. I think it's almost an obligation of those of us who are going to be living long lives to think about how we could rise to our highest levels in our later years, versus just simply winding off the playing field.”
Dychtwald also finds that many older adults want to age in place or age in community, or downsize, or relocate to a college town or a locale with better weather, or a locale closer to friends and family. “More and more people are now saying, coming out of COVID, that they like to remain active. They’d like to remain connected to their communities, but maybe even find a way to live where it won't cost as much, and they can be closer to people they love.”
Of note: A clear majority of American adults (77%) would prefer to stay in their current home as long as possible, a recent AARP survey of adults age 50-plus revealed.
Dychtwald also finds that older adults are now more comfortable working from home but it’s not going to be as satisfying to them as being in a workplace. In fact, what most retirees miss when they leave the workforce is less the paycheck and more the social interactions.
A New View of Healthcare Costs in Retirement
According to Sieg, many Americans underestimate the cost of living in retirement. So, what can Americans do to be better prepared financially for retirement, especially healthcare costs?
For his part, Dychtwald, mistake No. 1 is this: “We assume it's a solo project. Most retirement is a family project.”
As for healthcare costs, he said many Americans don’t factor it into the cost of living in retirement. “A lot of people don't want to think about the possibility of an illness or long-term care,” he said. But they should, especially since out-of-pocket healthcare costs could reach $440,000 for a couple in retirement.
(For more insight on this topic, read Planning for health care costs in retirement, Breaking Down Health Care Expenses in Retirement, Planning for Retirement Health Care Costs, Planning for Unexpected Health Care Costs in Retirement, and A New Way to Calculate Retirement Health Care Costs.
Another factor, according to Dychtwald, is that retirement and aging are not the same for women and men. “Women have about a 5-year higher life expectancy than men,” he said. “And by the last census in America, the average woman who was partnered with a man was partnered with a man who was 2½ years older than her.”
So, what does that mean? “It means that for most couples in their retirement years, if the husband is not feeling well or need some care, the wife will usually step in and look after him,” he said. “But then when the husband passes away, who's going to care for her? And have they both thought about, ‘Will that woman have sufficient resources to go the distance with peace of mind?’”
Given this trend, Dychtwald said it’s important that couples discuss this with their families and financial advisers “to make sure that both the male and the female side of the equation are well handled.”
Dychtwald also noted that while technology is important for older Americans, relationships matter more. “It's the people we care about,” he said. “It’s the people who care about us… I think having a network, having your own kind of tribe of people you connect to is even more important than the technology you use.”
Younger Generations Are Less Confident
Gen X, those born between 1965 and 1980, are not feeling confident about saving for their healthcare during their retirement years, and Millennials, those born 1981 to 1996, are worried they won’t be able to pay their student debt off before they retire, according to Surya Kolluri, a managing director at Merrill Lynch.
As for those who might face an earlier-than-expected retirement, Kolluri recommends they do a portfolio stress test, especially from a cash flow perspective. “What’s coming in? What’s going out? What’s in the balance?” he asked.
In addition, that group should also think about healthcare costs, how those costs inflate, and at what point long-term care kicks in. And that group should get some advice about Social Security and when to apply for benefits such that it fits one’s personal and family circumstances.
What’s more, those who retire earlier than expected need to think about life expectancy. Don’t just go with the averages, he said.
Consider: The chances that one of two spouses who are 65 will live to age 92 is 50%. The chances that one of the two spouses will live to age 97 is 25%.
Where to Find Income
With interest rates at historic lows, how might retirees generate income from their investment portfolios?
According to Chris Hyzy, managing director and chief investment officer within Bank of America Corp. supporting Bank of America Private Bank and Merrill Wealth Management, the answer can be found in one’s financial roadmap. “Can you accept more risk?” he asked. “And if you can accept more risk because your life expectancy's longer and your investment life cycle’s longer, then you should consider having less of an exposure to fixed income.”
His advice: Move into preferred securities from bonds, or move over into equities.
“What we expect in the next 10 to 20 years,” Hyzy said, “is there's a pool that we all know very well. It’s called the Gen Z pool and the Gen Y pool. And those two collectively are somewhere around 160 million people. So, we think there are two big trends going on. Even though interest rates are low, you have a pool of people building an equity culture again. So, there's likely to be a significant rotation, lower in fixed income, higher in equities over the coming couple of decades.”
Given that, he said retirees should consider, where the risks are appropriate, to increase risk more towards total return to pick up some dividend-paying areas, dividend-growth areas in equity that you would have traditionally received in the bond market.
As for market volatility, Hyzy said investors should have increased diversification across asset classes, including equities, fixed income, real estate, and other solutions that help mitigate volatility overall.
What’s more, investors should have a defined plan. “And that plan is about your target asset allocation,” he said. “But it's also about your rebalancing plan. When markets get very volatile it’s important to have a disciplined plan on how do we rebalance, and when to do it when the markets give you that opportunity.”
The other way to consider this, he said, is not just to look at your traditional equity versus fixed income standard asset allocation. “You have to look within those areas,” Hyzy said. “How do I want to be exposed and positioned within equities? Do I want to have more allocated to dividend growth areas because of the low interest rates in the bond market? Do I want to take a little bit more risk in bonds in terms of credit versus Treasury deals? How do I want to deal with that?”
And as for mitigating the risk of inflation given the significant amount of fiscal stimulus, he recommended having more exposure to “inflation beneficiaries” such as real estate, areas within the equity market that will benefit from a steeper yield curve, and areas that could potentially benefit from a solid core balance sheet in issuing higher dividends in the future.