There is startling gap between people’s expectations for their financial life in retirement and how it most likely will be. Many people, for example, will retire earlier, have less disposable income, and face higher medical costs than they intended to. Yet, according to the latest Retirement Confidence Survey, a poll conducted annually by the Employee Benefit Research Institute (EBRI) and independent research firm Greenwald & Associates, most American workers nonetheless feel comfortable in the ability to retire comfortably.
One of the most striking features of this ‘expectations gap’ is the age at which today’s workers say they plan to retire. Those with relatively low levels of retirement savings often comfort themselves with the belief that they can always continue in paid work after their official retirement date. After all, today’s workers regularly see seniors manning the checkout at convenience stores or doing other kinds of paid work to supplement their retirement incomes. The flaw with this observation is that those for whom poor health makes any kind work impossible are largely invisible.
How do you see your retirement?
The realities of retirement don’t match expectations
Therefore, people tend to overestimate their ability to continue working into old age. For example, 31 percent of workers in the EBRI survey said they expected to retire at 70 or older, and a whopping 79 percent planned to work in retirement. Yet, only 7 percent of septuagenarians have managed to delay retirement, and only 34 percent of retirees continue working for pay.
Most Americans also underestimate the length of their retirement. Did you know, for example, that a woman lucky enough to reach the age of 65 has a 50/50 chance of living an additional 20 years? The corresponding figure for a male retiree is an additional 17 years. Not surprisingly, therefore, people tend to hugely underestimate the costs of medical care during those retirement years.
To close this expectations gap the US population needs a generous dose of financial education. Ordinarily the education system ought to fill this role but, sadly, schools have lacked either the ability or the motivation to provide the public with the necessary levels of financial literacy. Hence, financial advisors have an essential role to play. Although ordinary savers might not care to grasp the intricacies of compound interest, or track the growth in healthcare costs, they do care when someone explains what it means for them.
Education about our entire financial well-being
And the advisors’ services need not end there. Although tight regulation of financial services firms means that savers and investors are more concerned about the return on their money rather than the return of their money, advisors can also give guidance on matters such as banking safety and on the need to keep online accounts secure. This means using secure networks when communicating with service providers and choosing financial firms that employ industry standard technology. Clients should prefer financial service providers that demand more than just a strong password to authenticate their identity. Many banks require the additional input of a unique passcode, usually sent as static text to the account holder’s smartphone. Another of the new authentication technologies used is the security token. This system uses a keyring-sized hardware that generates a unique six-digit code every 60 seconds. Even websites for online gaming are using token for transactions as they ensure that only the holder of the token at a specific moment can access accounts.
This kind of essential financial education does not necessarily require human interaction and so falls comfortably within the scope of so-called robo-advisors. These online services can check clients’ financial knowledge and security awareness before they embark on any investment or saving project. Good retirement outcomes begin with realistic expectations, but they also need sound financial knowledge and good housekeeping. Financial advisors are well-placed to fill all these gaps.