The recent phenomenon of the "Great Retirement" in the United States, significantly influenced by the COVID-19 pandemic, presents a notable shift in the labor market, especially among Americans over the age of 65. This impacts both retirees and non-retirees—resulting in widespread implications for the entire economy.
The pandemic is directly responsible for an unexpected increase in the number of retirees. As of September, there are approximately 2 million more retirees than were predicted pre-pandemic.i This is primarily due to:
As a result of these trends, we are seeing lower labor market participation rates, challenges in reentering the workforce, and shifts in retirement patterns for older Americans:
Ultimately, the long-term implications for those aged 65 and older, a group that was disproportionately affected by the pandemic, are unclear. This leads to greater uncertainty among these individuals, especially when it comes to the ability to participate in the labor market. These changes also reflect a deeper reassessment of work-life balance and retirement decisions among Baby Boomers.
Of course, the effects of the Great Retirement are not limited to Baby Boomers. The increased number of retirees and the decreased rate of labor market participation by those aged 65 and older has implications for non-retirees and the broader economy:
Overall, the Great Retirement has and will continue to have significant impacts, both positive and negative, on the U.S. economy and population.
Given that the Great Retirement affects Americans of all ages, Financial Professionals (FPs) must consider the effects on both clients aged 65 and older, as well as those outside of that cohort. However, in this post, the focus will only be on clients aged 65 or older. For this population, several behavioral finance insights are relevant, but three are of primary interest: the wealth effect, happiness, and social dynamics.
The wealth effect refers to the psychological phenomenon whereby people spend more as the value of their assets rises. This effect is often observed during periods of increasing real estate or stock market values (as was the case during the pandemic). When individuals perceive themselves as wealthier due to the increased value of their assets, they are more likely to spend, believing they have more disposable income. This can lead to less prudent financial behavior if the asset values decline later.
Understanding what makes clients happy can reap rewards for clients and FPs. Given that the pandemic led many Baby Boomers to reassess their priorities in life, understanding what may be driving (or not driving) their decisions is important to ensure they achieve their financial goals (whether new, revised, or existing). Behavioral research on happiness has many interesting and important implications for financial decision-making.
For example, many people underestimate the context in which experiences occur. As a result, individuals may think that retirement will bring them more happiness than it actually will. This is because of something called hedonic adaptation whereby people adapt to their new circumstances incredibly quickly (it can be as little as two weeks). While initially individuals may have a strong emotional response to retiring, this response will quickly and completely subside (i.e., retiring vs. being retired). For some individuals, this will mean they feel less happy or fulfilled than they believed they would be.iv
On the other hand, studies of day-to-day happiness have found that the things that make us most unhappy are: the morning commute, working, and the evening commute. These are all things related to non-retirement. So, in terms of day-to-day happiness, most people will be happier retired than not. However, after those three things, activities that make us most unhappy on average include housework, non-work computer time, shopping, and cooking—all things that will continue in retirement.v
Some clients may be adversely affected by social influence when deciding to retire or how to behave during retirement. First, some clients may want to retire simply because so many others in their generational cohort are. This is driven by both herding and social comparisons. For the former, clients may feel that retirement is the right choice simply because others are doing it, not because of an objective evaluation of their financial situation. For the latter, people can determine their own happiness or life satisfaction based on comparisons to similar others. If many around them are retiring, they may feel less happy with their situation because when they compare their life to those around them, they don’t feel as well off.
Ultimately, reaching out to older clients during this period of unprecedented retirement is important, whether they are already retired, considering retirement, or planning to remain non-retired. Regardless of retirement status, clients aged 65 and older will be navigating increased uncertainty due to the changing economic and social landscape, will need additional help with retirement savings management, will need assistance understanding future healthcare costs and with general longevity planning, and will need reassurance in the ability of their financial plans to adapt to both personal and broader economic changes.
Atlas Point can help you quickly and easily identify which of your clients are most prone to the behavioral tendencies discussed above. While it may be worthwhile to reach out to any clients aged 65 and older, there are clients who may be in need of extra support—those experiencing a wealth effect (which can be proxied for using the Recency Bias) and those prone to herding or the fear of missing out (FoMO). You can assess clients for several behavioral finance biases, including recency and herding, using our signature Financial VirtuesTM survey. You can try our Financial VirtuesTM survey here.
Atlas Point also has several Pulse Checks™ that can help you determine whether a client has a particular behavioral bias and the strength of that bias:
· Fear of Missing Out (FoMO) (this will indicate whether a client may be swayed by social factors when making financial decisions)
· Recency (this will measure whether a client is making decisions based on recent trends vs. long-term historical data).
[i] Alex Tanzi. “Millions of Retired Americans Aren’t Coming Back to Work as Predicted.” Wealth Management, 8 Nov 2023, https://www.wealthmanagement.com/retirement-planning/millions-retired-americans-arent-coming-back-work-predicted.
[iv] Frederick, S., & Loewenstein, G. (1999). 16 Hedonic adaptation. Well-Being. The foundations of Hedonic Psychology, edited by D. Kahneman, E. Diener, 302-329.
[v] Kahneman, D., Krueger, A. B., Schkade, D. A., Schwarz, N., & Stone, A. A. (2004). The day reconstruction method (DRM). Instrument documentation.