Even before the COVID-19 pandemic, most Americans faced significant barriers to retirement security. Only half of adults over 50 had more than $100,000 saved for retirement, and nearly 30 percent had no retirement savings or pension. Yet, according to research in 2019, the average American couple at age 65 could expect to spend $285,000 on health costs alone during retirement.
The unprecedented job losses and market swings of the past weeks have dramatically increased financial challenges for individuals and families. Aging adults have elevated health risks from COVID-19, as we know. But for many older people, the pandemic creates more than a health crisis; it also impacts their financial security in retirement. While younger workers have time and the power of compounding on their side, retirees and pre-retirees face critical near-term decisions about their financial futures, all while grappling with the immediate threats of the coronavirus.
To discuss this critical challenge, the Milken Institute brought together leaders from the financial sector to explore how the COVID-19 crisis may transform retirement and investment, and how those planning for retirement can weather financial disasters and enhance their financial security. The webinar featured Marcie Frost, CEO of CalPERS; Penny Pennington, managing partner of Edward Jones; Michelle Seitz, chairman and CEO of Russell Investments; and Michael Milken, chairman of the Milken Institute, with Paul Irving, chairman of the Milken Institute Center for the Future of Aging, serving as moderator. Four key issues surfaced during the webcast: the path forward for financial markets, the need for recovery strategies for retirees and pre-retirees, the promise of new technologies to support retirement investment, and the interconnected nature of physical, emotional, and financial well-being.
Path Forward for Financial Markets
The COVID-19 crisis and the related financial downturn can be differentiated from previous financial crises, such as the Great Recession in 2008. Milken observed that "this is a crisis brought on by a virus and a health problem spreading throughout the world." This factor may mean a swifter recovery than with previous events once economic activities resume with adaptations to protect health. Frost cautioned that “post-COVID-19 will quicken the pace of some of the macro-economic drivers that we were beginning to see emerge.” While well-executed strategies across the private sector and government stimulus efforts can mitigate pandemic-related losses, additional efforts are needed to target underlying gaps in savings and investment to support workers preparing for retirement.
Recovery Strategies for Retirees and Pre-Retirees
Panelists recognized that new tools and strategies are needed to help people recover from this current downturn and better prepare for the future. Pennington observed that “we are all looking for some certainty…in our financial well-being,” and that it is critical to identify options under an individual’s control. These include the makeup of investment portfolios, as well as savings rates and lifestyle choices. Frost further emphasized the importance of responding to “significant life events that happen over time by readjusting portfolios and expectations in light of longevity risk and market risk, which need to be brought down as people age.” By taking actions to address savings, investment, and spending in response to COVID-19, retirees and pre-retirees can position themselves to recover.
New Technology for Retirement Investment
The financial sector, through new technologies, can provide personalized pathways for tailored investment decision making in support of retirement security. Consumers have increasing access to their financial information through apps that encourage closer monitoring and defaults like auto-enrollment and deductions that promote saving. Additional tools with potential for significant impact are on the way, too, such as enhanced consumer interfaces that take into account multiple data points beyond an individual’s target retirement date. Seitz urged action: “We need, as an industry, to make it easy for people to make good decisions for themselves and hard for people to make bad decisions. We need to use technology and make the ecosystem of investing simpler, so you can have fact-based, data-driven conversations that are personalized to the individual level.” Creating change to support better financial preparedness is an urgent priority; the retirement gap for Americans aged 35-64 totaled $3.68 trillion in early 2020, a record high, and is estimated to increase by $166.2 billion if market losses persist over the year. Given the dynamic nature of people’s lives and finances, especially when coupled with the risks presented by market volatility, new technologies offer a promising option for helping narrow the retirement gap.
Physical, Emotional, and Financial Well-being
Physical, emotional, and financial well-being are interconnected, especially in times of crisis. Pennington predicted that these three factors “will be defining for those in retirement and those who are watching their parents work through this, and I expect…we are going to be more attuned to our health and more attuned to our financial well-being.” Milken cited a survey on the American Dream, where personal wealth was ranked as the lowest priority: "The number one priority was the freedom to raise their family, [followed by] enough in retirement savings to live a comfortable life...they are thinking about a retirement that gives them freedom to live their life." An individual’s physical and emotional well-being will inform critical financial decisions, as health and wealth influence and impact each other over a lifespan.
The COVID-19 crisis shines a spotlight on gaps in financial health for Americans at all stages of life, but especially for older adults. Retirees and pre-retirees need immediate, innovative solutions to address their widening financial shortfalls; personalized solutions and new technologies can start the process of recovery. While there is much to be done to protect the retirement security of Americans, we can also seize this opportunity to increase engagement and create lasting change.
The recording of this panel discussion can be accessed here: https://milkeninstitute.org/videos/retirement-security-wake-covid-19-conference-call-series