People Count

RISING LIFE expectancies, coupled with slower population growth, have a huge impact on how we should manage our money. Here are seven key financial implications of today’s momentous demographic shift:

1. Economic growth will be slower. Over the past 50 years, half of the economy’s 2.9% annual growth has come from increasing the number of workers and half from increasing the productivity of all workers. But with the labor force projected to grow at 0.5% a year, rather than 1.5%, economic growth will almost inevitably be slower. That means slower growth in corporate profits and hence lower stock returns. To compensate, we need to save more for retirement and our other goals.

2. We can’t all retire in our early 60s, because there won’t be enough folks in the workforce to produce the goods and services that society needs. Economic pressure—which might take the form of rising taxes, cuts to Social Security and Medicare, higher inflation or lower investment returns—will keep many of us working well into our 60s and perhaps even our 70s.

3. We’ll need more than one career to get through our working years. Even if global competition and technological innovations don’t force us to change careers, we’ll likely want to. Four or five decades is an awfully long time to do the same thing.

4. Retirement is becoming more expensive. With median life expectancies heading toward age 90, folks will need larger nest eggs to pay for an increasingly lengthy retirement, including the hefty health care costs that accompany it.

5. The big financial risk isn’t an early death. At that juncture, all of our financial problems will be over. Instead, the big risk is living longer than we ever imagined—and running out of money before we run out of breath. Delaying Social Security benefits, to get a larger monthly check, is looking smarter and smarter.

6. As life expectancies grow, so too does our investment time horizon—which means stocks are more appealing. Yes, their returns will probably be modest. But stocks are still likely to outpace bonds and other more conservative investments.

7. Faced with the prospect of navigating multiple career changes and a lengthy retirement, it becomes more important than ever to start saving as soon as we enter the workforce. That way, we buy ourselves some measure of financial security early on—and that could save us from a lifetime of financial anxiety.

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