As I was doing the usual first-of-the-year stuff at my small community bank - setting up astronomical lines of credit, filling my file with financial reports, etc. - when our conversation turned to the problem the bank president anticipates with elderly people rolling over CD's.
With current rates for a 1-year CD in the vicinity of 1.6%, savers who rely on that fixed income are getting pretty desperate. Too many, she worries, will opt to leave it in an interest-bearing checking account until something better comes along. Not only is that of course worse for earnings (about 0.6%, I think), it leaves the money way too accessible for her comfort.
She's not alone in that concern.
Mike Konczal today comes up with something which in and of itself is reason enough to set up a Consumer Financial Protection Agency: ageing boomers. As David Laibson notes,
the prevalence of dementia among Americans “explodes” after age 60, doubling every five years to more than 30% of the population over age 85.These individuals are sitting ducks for predatory financial-services professionals, and it’s entirely right and proper for the government to step in and stop such thievish firms from extracting huge chunks of elderly people’s life savings.
The fact is that choosing a financial advisor is just as hard as picking stocks, and it’s statistically inevitable that millions of cognitively-confused Americans will choose badly. That’s not really their fault, and the CFPA, among other institutions, should hold all financial advisors to a strict fiduciary obligation, cracking down hard on those who end up costing their clients large amounts of money. This is not a role that bank regulators can or should have, and I certainly have no faith in institutions like Finra to grow any teeth when it comes to such matters.
So let’s get a CFPA up and running soon: the rich are becoming old fast, and that’s a potentially explosive combination. [More]
To add to the danger, increased financial regulation is introducing new paperwork, which, while trying to protect both savers and borrowers adds another layer of explanation for the finance industry. All the time the general atmosphere of general distrust on conservative media (which is popular with older folks) provides a backdrop for bad decisions by the elderly with their money.
Other countries are struggling with the same problem of how to protect older citizens without infringing their rights - or at least too much. More information (transparency) doesn't appear so far to be a magic bullet.
A better example is the market for annuities. Unlike health care, providers can offer identical products; it is simply a series of payments made to the annuitant. If two insurers have the same credit rating, their probability of defaulting should also be identical. Thus the price they offer for a particular product should be roughly equal. This has traditionally not been the case.
In America this may be because so few people buy annuities; the market is very thin. In Britain people with private pension accounts are required to buy annuities, but there still exists a wide dispersion in annuity prices. To increase transparency the Financial Service Authority (FSA) website offers annuity estimates from highly-rated insures. I just checked the price of a life annuity with an inflation adjustment. I found a 22% difference in monthly pay-out, for the same premium, between the highest and lowest offer. That is a 22% difference in monthly income for the duration of a pensioners' retirement!
It could be that pensioners do not bother to check the website because they take the annuity offered by their pension provider. Providers sometimes offer a loyalty rate or facilitate the annuity purchase. Perhaps prices will converge as more people retire and receive more education. But so far the evidence suggests the benefit of transparent pricing is limited, particularly when insurance companies are involved. [More]
I'm afraid not simply questionable investment salespeople, but charities and advocacy groups will intensify their focus on our aging Boomers and their considerable wealth. The results will not be pretty.
This could impact farmland and elderly owners - both positively and negatively for farmers. Very old owners tend to be reluctant to make tenant changes, and frankly are often taken advantage of by operators. More than one career I have seen ended when a landowner death brought an end to an operation accustomed to obsolete (highly favorable) rental terms. And more than a few of us pray for landowners who hang in there until we are retirement age.
But at the same time, it does afford some scarce tenure security in highly competitive markets. I could also see farm management companies marketing as heavily into this group as financial advisers are doing for the elderly.
All the more reason to constantly work on deepening your personal as well as professional relationship with your landowners.
And to get our wealth in the control of a younger trusted brain while we can still think at 100% (or as close as we normally get).
5 comments:
I think dementia in America is a much bigger problem than just with senior citizens and their finances. When you look at the strange things people believe in, the extremism, fanaticism and paranoia and how groups can be so easily manipulated to a belief whether it be real or fantasy, I really have to wonder about the mental capability of many Americans of all ages. Our world is not a very rational place right now and many signs of mental instability are evident. Is it something we eat, something we drink, maybe "better living through chemistry" has finally caught up with our brains.
John,,you have got too stop writing these "old people" blogs as last month you had me wondering if my wife and I had too go into a health care facility in our 60's would the whole "farm" assets be ate up in extended care if we where too live to be say 85,,or with inflation would we have enough?? gee just got over worrying about fertilizer prices,,now this...anyways it is kinda scary future out there..when do you think is the best time then too transfer wealth too next generation?? we have given it a lot of thought and still are puzzled-30 yr. olds and $5k+ land is a tough go.. .best regards in 2010 for you and your family-kevin
About 'accessibility'...My mother-in-law wanted to get some money from her annuity. There were so many hoops for her to jump through that she is fed up. She may take all the money out just so it will be accessible. It took 3 weeks, and several phone calls and faxes to get the money back out. This can be frustrating... and gives the moneyholder longer to make money from her money...so accessible may be a good thing.
Then I went to deposit the money in another account for her, and found out that people are trying to deposit checks that appear to be from legitimate sources, but are a scam. So one does need to be on the alert for such thing, as well. I guess you have to trust your banker with one hand on your billfold so he can't get it when you are not paying attention! So I am cynical...
kevin:
Letting go of control isn't easy. Let me suggest one horrifying step: full disclosure.
We handed over the same copies of our books as we give our banker to our sons and DILs. The first thing I discovered was how much it helped them understand how we have run and built our farm.
Once that exposure is acclimated to, I began to ask them what they thought I should do and occasionally do it.
Now Aaron has been home for 2 years and with his brother's advice I think they are pretty well prepared to make decisions - probably better than me.
Of course, that's a low bar...
Note we have not transferred much actual wealth per se, just decision-making power. I still have to work out from under a "cash-accounting tax hangover" before I can give stuff away, but they are helping with that as well.
Look, I made mistakes taking care of my grandmother, parents, and aunt's finances. I suppoe they will too, but they are much more responsible with money than I am so I think the result could be win-win.
At any rate, they are going to be taking care of me too long, I better get used to it.
I think it is important that the next decision-makers in line are fully aware of all the ins and outs, ups and downs, pros and cons, etc. of the finances and how much control they're going to have. It is a constant learning process and tough process.
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