Stephen Chen has leveraged his experience as an entrepreneur and director at Charles Schwab to change how we're saving for retirement at the company he founded and leads, NewRetirement. He took a few moments to discuss retirement planning and the future of saving to retire.
Why should we be automating retirement planning?
A few reasons:
There just aren't enough Certified Financial Planners (CFPs) to go around - today there are 70,000 CFPs - not all of whom are active and many of whom don't specialize in retirement; and we have 75 million Baby Boomers retiring over the next 15-20 years. If we assume that half of CFPs could serve this population, then we have ~2,000 people per CFP.
Many consumers are "self directed" and/or start their research online and they'd prefer to see what they can learn on their own before they meet with a person.
Most consumers don't have enough assets to be of interest to a fee-based financial advisor - so they end up being served by insurance brokers or other salespeople who may not be aligned with the consumer's best interest since they are compensated when they sell a product. For example, many advisors who are fee-based make ~1% on your money, so you need to have at least $500,000 for them to manage, and the average Boomer has about $125,000 in their 401(k).
What are some common retirement planning mistakes automation can avoid?
Automated retirement planning can look at your whole picture and consolidate expertise from a variety of fields - not just investments; be unbiased - not limited to one point of view; allow you to quickly run different scenarios and change assumptions; and be available anytime, anywhere.
What's a realistic retirement goal for younger workers? Are we going to shift away from 65 as the age of retirement?
People are living a lot longer these days, and we also have technology making us all more productive, so I think we'll see a world where people will actually have to work fewer hours per week in the future but may choose to work longer to remain engaged and fulfilled. So I think you may see a world where people "gear down" sometime between 50 and 65, for example shift from 40-50 hours of work a week to 30-40, and then some may move to work they find more fulfilling once they hit their mid-60s, but many will work into their 70s.
What are some challenges older workers are facing as they transition to retirement?
There is definitely ageism once you hit 50 years old - most people think they will work until 65 doing the same kind of work they have been doing, but the stats show that people actually end up stopping their traditional careers closer to 57.
There are also health issues. Paying for healthcare will be a major challenge. A recent study found that couples retiring in 20 years are expected to need 127% of their Social Security benefits to cover healthcare costs, while couples retiring in 32 years will need 190% of their benefits.
There is also the huge issue is caring for aging parents. There are enormous costs around caregiving that most people aren't aware exist until they are dealing with the issue. Very often, a working adult child of the aging parent has to put a lot of their time into caring for a parent, which can impact their earnings and add a lot of stress to their lives. I've seen this in my family, where my wife's grandmother had a stroke. My wife's mother and her six other siblings are rotating through traveling each weekend to contribute to caring for the grandmother, and even with this family care, most of the grandmother's savings have been used up.
To fund healthcare, we will need to get creative. Reverse mortgages, deferred lifetime annuities and relying on family and friends will become increasingly popular financial strategies.
Should we count on Social Security, and why? If not, why not?
I think Social Security will be there, since it's such a popular program, along with Medicare. However, the Social Security Trust Fund is set to expire in 2033, at which time incoming taxes will only cover 75% of promised benefits. So - they will have to raise taxes, do a means test or push out the Social Security Start date. I think it will be a combination of taxes and encouraging people to delay their Social Security start date - which is pretty much the best retirement security move people can make regardless.
What are some trends in retirement planning we should be keeping an eye on?
We think that a "new" retirement means that people will be using a wide variety of their resources to fund their lives - human capital, technology, government programs, friends and family, home equity, insurance and savings/investments.