The short answer is yes. The more complicated part to answer is why.
There are some obvious environmental explanations that a lot of us probably already know and talk about. We are all living longer lifespans. The pandemic appears to be a never-ending story. Inflation and the cost of living have skyrocketed. And if you haven’t heard, there is limited accessibility to credit for this demographic for building wealth accumulating assets.
While these are known environmental factors, science is proving that we may need to dig deeper into the behavioral aspects as well. Our finance behavior hit list includes:
– Peeking Into Your Retirement Chrystal Ball
– Financial Trauma Tolls for Thee
– Gloom and Doom Over the End Of Social Security
– Passing the Financial Wellness Potato
– Where Art Thou Financial Literacy?
– Final Answer: Moving Mindsets
Peeking Into Your Retirement Chrystal Ball
Transitioning into retirement is arguably one of the most challenging transitions in life. This is where you stop being a money-making factory, and potentially endure an identity crisis—as your ego may have been tied to your work or raising a family and you are closer to facing your mortality and worse yet, facing a role reversal with your family from caretaker to needing help.
Because of these factors, it’s incredibly important to visualize what retirement looks like to you before you have the party. Where will you live? What will you be doing? What stores do you want to shop at? How will you get paid? How long will your money last? How will you react if something catastrophic happens?
Financial Trauma Tolls for Thee
Financial dysfunction is rooted in trauma, often initially sparked during childhood. All of our behaviors and habits are learned, and a great deal of them are during development, so it may not be a huge surprise that we began our financial learning in childhood. What we experience with our family and surroundings can echo in our individual lives—either unconsciously repeating patterns witnessed, consciously rejecting forced teachings, or an inner critic acting as a judgmental and/or misguided voice in decision-making.
As an individual goes about their own life, they may then experience further trauma from their actions and the actions of others they encounter. Some examples of traumatizing financial experiences are:
- Someone stole from you
- You became ill or a caretaker
- Divorce or Breakup
- Shame around self-control or judgment/decision making
- Felt tricked by someone
- Fear of making the same mistakes
Trauma can lead to denial, where facing reality feels so painful that avoidance becomes the modus operandi. Denial is a fairytale land where we believe something magical will come in and save us. Unfortunately, the opposite is likely the case, and the attempt to avoid the painful reality actually puts the individual at risk of repeating the trauma cycle again and again. The truth is, there is no magic, and we need to make a plan to confront our demons before they confront us.
The good news is that we have power, and our power is in taking control. The first step towards healing your trauma and taking that control is to reveal that magic doesn’t exist! Remember, magic is an illusion. It’s not real. The real power exists in making hard choices. Make the choice, or the choice will be made for you.
Gloom and Doom Over the End Of Social Security
American workers in the middle-income bracket have a retirement gap of 30%. According to a recent AARP survey, the wage replacement ratio for social security is 40% for $56K of earnings, and the median household income was $65K in 2020. Using an average wage replacement ratio of 70% for retirement, this means (in our best Ricky Ricardo voice), “Americans have a lot of planning to do.”
This shortfall has to be made up from a mixture of pre- and post-tax savings or from the elusive unicorn―a pension plan. If you are lucky enough to have one, you’ll believe in magic when you receive a windfall of a lump sum payout. However, now you are faced with a heavier burden of―now what?
Ultimately this shortfall will fall back on the taxpayers through various government spending programs. While it may be too late for the Boomers, we have a lot of work to do regardless of what wealth accumulation stage you are at in life.
Passing the Financial Wellness Potato
We probably don’t need to spit out survey results to understand that people feel insecure about their financial wellness for some, or all of the reasons cited in this blog post, but according to a recent TIAA Survey:
- 20% of Americans with high financial wellness can’t cover six months of living expenses,
- 7 out of 10 have a budget, but only 25% of those follow it,
- 6 out of 10 report some or a great deal of stress regarding their finances, and
- 5 out of 10 think employers are responsible for nurturing their employees’ financial wellness.
So, who bears the responsibility for the improvement of Americans’ Financial Wellness? One could argue the government should take a considerable stance since they are likely to be the entity writing the check. We would argue this one step further and say that since this money comes from taxpayers, the answer is really—everyone.
Where Art Thou Financial Literacy?
So, how do we cope with the emotional traumas and gloom and doom of economic data? How do we help nurture financial health? It all comes back to improving individuals’ financial literacy skills and nourishing their overall financial wellness.
Teaching financial literacy skills must be a multivariate approach to conquer this dragon.
- It starts in the home―Did you know that your money mindset is set by seven?
- It should continue in our schools―Currently, only nine states have financial literacy mandates as a requirement in high school education. Data shows financial literacy rates are higher among individuals in those states―so it’s working.
- It should be mandated in the workplace―Of our largest working population, Gen Z, 2/3 of them believe employers have a responsibility to help improve their employee’s financial wellness. According to a recent TIAA survey: only 50% of workers receive financial wellness resources from employers, and of those, only 50% of the employees utilize those services. Bottom line. People with higher financial wellness scores are willing to put money towards retirement.
- It must provide protection and abundant resources for seniors―Elder fraud is rampant in every industry, especially ours. People prey on the deteriorating cognitive ability of seniors. We must provide safe, educational spaces for this community to obtain financial guidance.
- It demands the government to provide incentives―Give tax credit for financial planning and move RMD beyond 75. People are living longer and working longer.
- It must be a holistic approach―Ask someone on the street, “Do you know what holistic financial advice is?” Google will tell you they have no idea. Then turn around and ask the same person, “What does a financial advisor do?” “Ah, they help me invest my money in the stock market.” Financial wellness is only achieved through comprehensive financial planning, including how to earn, spend, save, invest, and protect your assets. The old advisor model is dated. We need to do better and educate consumers.
Final Answer: Moving Mindsets
We all need purpose in life. Individuals need to take a moment to visualize what retirement looks like. We must prepare them to slay their ego and what may happen when their sense of self is tied to their work, income, and purchasing shiny things. We must help them remove any shame around past regrets or wrongdoings of others. There is always an answer, you just need to create a plan and make sure the math works.
In the end, humans are hard-wired for two basic needs-survival and meaning. The real magic lies within our fiduciary duty as financial advisors to provide a well-thought-out retirement plan rooted in data-driven numbers that will help slay the denial dragon. Thus, Americans will be suited in the armor of financial wellness as they slay their ultimate quest for meaning during their retirement years.
