In the picturesque town of Warren in Vermont’s Mad River Valley, there were seven houses for sale on Main Street before the pandemic started. Now all are sold, most to professionals working remotely, according to town resident Jack Sharry, executive vice president and chief marketing officer of LifeYield.
Suddenly, people are making major life transitions in the blink of an eye. An advisor relates the tale of a Connecticut money manager she knows who recently bought a 300-acre corn farm in Kansas after a brief visit.
Some decisions, like buying houses sight unseen, seem impulsive. But living quarters are everything during an epidemic, and record low mortgage rates can spike the punch bowl.
It’s too early to tell whether the changes are temporary or permanent. Still, as Americans are being forced to alter their lifestyles, some are going a step further, uprooting their careers and, in a few cases, retiring outright.
Ten years ago, as the Great Recession started to recede in the rearview mirror, a silver lining surfaced for Americans who remained employed. The driving force for higher-earning workers was a shifting demographic picture. As bleak as the job market was in 2010, it was clear that with an aging population America would begin to face a labor market shortage that would accelerate by the end of the decade.
For younger baby boomers who failed to save enough for retirement, this turned into a reprieve, a last chance to keep working and invest their 401(k) plans in a cheap stock market. Survey after survey found that many people wanted to work past traditional retirement age for a variety of reasons. Earning an income and remaining active topped the list.
As late as this past February, that scenario appeared to play out. Workers over 55 years old were the only age group to enjoy increased participation in the labor force during the last expansion.
Today, planning for the next two years, if possible, has dwarfed long-term goals.
Early retirement offers a new appeal. When Delta Air Lines made the offer to its own employees, 17,000 jumped at the chance. More are expected to sign up.
Most clients of financial advisors possess a higher degree of control over when they retire than the average American. That doesn’t mean they are immune to the fallout from the pandemic or that they aren’t rethinking their careers.
The economy may have hit bottom, but many companies are likely to re-evaluate high-paid employees’ contributions as the recovery unfolds. This could bring another wave of downsizing to white-collar professionals in affluent communities. Some, like Moody’s chief economist Mark Zandi, have also warned of a new round of salary cuts at many businesses.
Michelle Connell, owner of Portia Capital Management in Fort Worth, Texas, fears that older workers could become a casualty of the pandemic. She notes that in May the combined unemployment and under-employment rate for workers over 65 was 26%, or 5% higher than that of workers age 25 to 54. Older workers face new questions during an epidemic like health issues, as well as old ones like silent age discrimination, and possible job displacement as employers move to digital services. Their health concerns are real, and so are employers’ fears of liability if their employees get sick. Companies in many industries, including financial services, are struggling hard to find next-generation workers, and older employees could become collateral damage for that reason as well.
It’s a two-way street. More than a few professionals in their late 50s or early 60s are close to reaching their retirement goals, and a new focus on quality of life may start to supersede the desire to attain some financial number on a financial plan.
For example, several advisors report that physician clients are committed to staying on the job and riding out the epidemic, but they may well reassess their careers after that. Given the upswing in social unrest, some policemen could well be kindred spirits.
Connell says it’s a big risk for people to follow the impulse to take early retirement—or even to quit a job now and wait for the economy to recover in a few years. She cites a recent McKinsey study that projects nine out of 10 jobs emerging for displaced workers after the current recession will pay less than jobs that have been eliminated.
Small business owners and employees, nearly half of all American workers, are particularly vulnerable. A comeback for many small companies could be protracted.
People over age 50 are likely recalling February’s 3.7% unemployment rate and thinking it’s realistic to switch careers after taking a sabbatical, but they might be in for a rude surprise. “I’d be particularly concerned when it’s someone’s career,” Connell says. “They might not get a second chance. Or they might be unemployed for a lot longer [than they think].”
Advisors and their clients must deal with the variables they can control, the “known knowns,” and what post-pandemic America will look like isn’t one of them. What is fairly certain, if the Federal Reserve is to be believed, is that interest rates will remain extremely low for the next two years. Some bond market professionals argue a “lower for longer” interest rate regime could remain in place for five or even 10 years.
The implications for older Americans—and particularly recent retirees—of persistently low rates could be profound, according to David Blanchett, head of retirement research at Morningstar. Many financial plans, he says, are not structured to address this problem.
Virtually all financial assets are priced off of interest rates. The lower short-term Treasury notes are, the more anemic other asset classes are likely to be. How many advisors, Blanchett asks, want to be reaching for yield with long-duration bonds?
Some advisors like Janet Briaud in College Station, Texas, have delivered equity-like returns for clients with these securities, thanks more to capital appreciation than interest income. But unless long-term rates go negative, those days appear to be ending.
“Bonds are still super safe, but after you tack on inflation, fees and taxes, there is no way you’ll have a positive real return,” Blanchett argues.
The results in Europe and Japan, where people save more and enjoy a stronger social safety net, are not encouraging. The obstinacy of near-zero interest rates also makes a powerful statement about how soft the global economy is. At the peak of America’s longest recovery in 2018, markets became unsteady in 2018’s fourth quarter after the Fed raised the discount rate to a modest 2.5%.
Jamie Hopkins, head of retirement planning at Carson Group in Omaha, Neb., notes that his firm, which has 34,000 clients, is seeing an uptick in inquiries about claiming Social Security. On a national level, May statistics show there was an increase in claims, he adds. But it’s too early to say whether another wave of 62-year-olds are taking the benefit the way they did in 2008 and 2009.
The yields on bonds, TIPS and annuities are all being challenged by low interest rates, but these market conditions also have propelled equity prices to levels many fear are excessive. This creates the potential for sequence-of-returns risk for newly minted retirees.
Academics like Wharton School professor Jeremy Siegel have argued for the last year that, in light of the unprecedented paltry yields in the fixed-income market, a 75%-25% portfolio may be the new alternative to the traditional 60% equities-40% bonds allocation favored for decades by advisors, pension funds and other investors. The strategy has merit, but clients who embrace it need to understand the risks.
All of which makes the default option of working longer that much safer for many Americans.