Investments & Wealth Monitor - Preparing for The New Average

In the January/February 2024 edition of Investments & Wealth Monitor, author Joseph F. Coughlin, PhD (founder and director of the Massachusetts Institute of Technology AgeLab), explores the profound demographic shifts reshaping financial services and outlines strategies advisors must adopt to serve the emerging 'new average' client, characterized by evolving lifestyles, longer life spans, and greater diversity.

As advisors face a rapidly changing client landscape, Coughlin underscores the critical need for innovative thinking, personalized strategies, and a deeper understanding of emerging trends. By anticipating the needs of tomorrow’s clients, advisors can not only adapt but thrive in the face of transformative change. The Investments & Wealth Institute remains committed to advancing the practice of investment and wealth management through rigorous education and premier certification programs. This article exemplifies our ongoing efforts to provide thought leadership and practical insights that help financial professionals deliver better client outcomes.

Preparing for The New Average

Wealth management advice has long enjoyed general homogeneity in its target client. For decades, the average client could be described best a male, white, and married with children. Beyond basic demographic characteristics, that same client could be assumed to follow a predictable life course with equally predictable financial and insurance needs, e.g., education, work and savings benefits, marriage and life insurance, home financing and insurance, wealth accumulation, college savings for children, and of course, retirement and legacy planning, culminating in a life of seven decades or more.

That once average client remains a significant segment of the financial services market for the foreseeable future but will no longer be the defining market segment. In fact, tomorrow’s next-generation client will have new lifestyles, experiences, needs, values, and preferences that will make successful strategies from decades past less effective in tomorrow’s marketplace. The financial services industry, specifically advice and wealth management professionals, must rethink today’s products, distribution assumptions, advisory services, and overall client engagement strategies to respond to the evolving needs of tomorrow’s clients.

Five High-velocity Demographic Trends

Demography is destiny. An examination of census and polling data show that tomorrow’s clients are already here and growing in numbers, accumulating wealth, and introducing new lifestyles and related financial needs. This discussion focuses on five high-velocity demographic trends shaping tomorrow’s financial services and advisory business for the decades to come. These trends show us that the future may be best described as gray, delayed, small, female, and diverse.

The Future is Gray

Global aging and increasing longevity top the agenda for many, if not most, financial services firms. Longer life is described as a gift but also as a risk. Longevity risk, the possibility of outliving one’s wealth, is a significant driver of product innovation, particularly in annuities and insurance to ensure lifetime income.

With a few exceptions among individual groups, average life expectancy continues to increase in North America. Figure 1 shows that life expectancy in 1920 was a mere 53 years. One hundred years later, life expectancy, on average, is about 80 years. In fact, the fastest-growing segment of the population is people older than age 85. The promise of a longer life is particularly true for individuals with the good fortune of having a college education and higher income (Chetty et al. 2016).

According to the Administration on Community Living, the population of people in the United States older than age 65 is projected to grow from nearly 60 million in 2024 (17 percent of the population) to about 95 million (estimated to be one in four Americans) by 2060. The future older consumer will be more numerous and is likely to be more educated and have more buying power than in past generations, creating a virtual "longevity economy" of consumers seeking to live longer, better (Coughlin 2017).

However, population aging as we know it today often distracts industry strategists from an underlying transformative trend—the high probability that many of today’s children and young adults living in the highly industrialized economies will live to be 100. Research suggests that nearly 50 percent of children born since 2000 likely will live an entire century (Christensen et al. 2009).

Longevity changes everything. Preparing for 100 years of life goes well beyond traditional retirement planning and related financial services. Imagine a working life well beyond today’s norm of three or four decades that instead extends to 60 or more years. Suddenly, funding education may no longer be just about a child’s college fund. It may include a professional education savings account to finance a midlife sabbatical or matriculation in part-time programs to ensure professional competitiveness in an everchanging labor market. How many jobs or careers will people have, requiring portability and planning of savings and related benefits across how many employers? The highest divorce rate today is among couples who are older than age 50. How many marriages and relationships will last more than five decades? Will a dramatic increase in the number of blended families add new complexities to wealth transfer planning? How many places might people live during 80 years of adulthood? Moreover, how will today’s definition of retirement change? Clearly, policies and cultural norms that make it possible to have nearly as many years in retirement as years of working are not economically sustainable and perhaps not even desirable.

Today most people are hacking longevity, not planning for it. Today’s client needs new thinking, novel content, innovative products, and comprehensive advice to anticipate what a longer life entails and demands, not just how to pay for it.

The Future is Delayed

For decades the needs and wants of the average client could be predicted with a standard life stage model where age and life stage were in sync. Moreover, each life stage and related financial need maintained a predictable cadence. Not so today.

Although many observers see increasing longevity resulting in more years of retirement, longer lives actually may extend the time spent in earlier life stages. In some cases, entirely new life stages may emerge. Whether extended or new, each life stage presents new financial and life questions in need of advice.

For example, a gap year for college-age students today is different from what a gap year was for their Generation X and baby boomer parents. Decades ago, a gap year typically was taken because of less than competitive grades or college entrance exam scores. Students took a year or more to improve their scores and attend preparatory classes to improve the likelihood of being admitted to college. Today, many young people take a gap year, or years, as a path into adulthood. Rather than a time used to improve college board scores, a gap year also may be used as a study break, for travel, and a period of personal growth.

Even the idea of when adulthood begins is evolving. Psychologist Jeffery Arnett (2015) has identified a new life stage called "emerging adulthood" to characterize the years between adolescence and adulthood. Adulthood was once marked by ages associated with social and legal milestones. For many, turning age 18 typically was associated with graduating high school, the right to vote, registration for military service, moving out of the family home; for others, age 21 was associated with college graduation, legal drinking age, a full-time job, and a quick launch into adulthood.

The age where adulthood begins today is more ambiguous. Emerging adulthood suggests that adulthood begins in the mid-20s, perhaps even well into the 30s. Emerging adulthood invests the years that were once considered young adulthood—marked most often by leaving the family home—into a new life stage that provides time to explore and consider the possibilities of an adult life still ahead.

For many young people, age 27 has become the new 17. As of 2021, 39 percent of 21-year-olds were working full time compared to 64 percent in 1980 (1). Likewise, only one in four 21-year-olds were financially independent of their parents compared to 42 percent in 1980.

Young adults are living with parents longer, too. Figure 2 shows the steady increase in the percentage of young adults ages 18–29 living with parents from 1960 to 2020. Note that the 2020 percentage of 47 percent reflects pre-COVID-19 data in February 2020. As of July 2020, four months after widespread quarantine, the percentage rose to 52 percent. Even when including older adult children, one in three people ages of 18–34 live with parents. (2)

Many young adults not living with parents are in college. For those that attend college, the National Center for Education Statistics reports that only 41 percent finish in four years, and many take six years to complete a four-year program. (3)

Perhaps a major milestone of adulthood is finding a partner and establishing a new household. That life event also is delayed. An estimated 51 percent of Americans ages 18–34 in pre-pandemic 2019 did not have a partner, compared to 33 percent in 2004.

A delayed start into what was once considered young adulthood has financial implications. Starting a career later delays predictable income and benefits, possibly postponing when peak earnings may occur. A delayed professional start is likely to defer homeownership. The beginning of real wealth accumulation, as well as the related investment growth potential over time, may be effectively delayed to an age that many once considered the eve of midlife.

The Future is Small

Family units and households are smaller. The number of people living in the average household has decreased over time. In 1960, the average number of people living as a household was closer to four, and today it is closer to three. This decline is due primarily to couples choosing to have fewer children. In fact, birth rates have been declining worldwide for many years, especially in industrialized economies. A nation requires 2.1 children per woman to maintain its population size. The United States has not been at this replacement rate since 1972 and owes its population growth to immigration. As shown in figure 3, the 2023 U.S. birth rate is estimated at 1.7 children per woman.

Some may suggest that having fewer children, or no children, has positive financial implications by foregoing the costs of raising a child and paying for college. Those savings, however, may be short-lived. Among the many reasons to have children is the expectation of having someone to care for you at an older age. Fewer children mean fewer family caregivers for an expanding aging population.

The Congressional Budget Office projects that the percentage of people ages 65+ relative to population ages 25–64 will increase from 34 percent in 2023 to 46 percent in 2053. (4)               Adult children typically provide care including social support, shopping, home maintenance, food preparation, health management, financial administration, and more to maintain the health, independence, and well-being of aging parents. Informal support from an adult child often delays or negates the associated costs of senior housing.

Even if an aging person or couple has adult children, they may live too far away or may be too busy to provide care. Older adults without children, or with children who are not available to provide support, will have to plan, finance, and identify trusted services to effectively outsource care once provided by family. This will be a new cost in retirement that few families have considered.

However, the cost of providing informal care is borne not just by older adults. Fewer children also mean fewer siblings to share caregiving demands, often leaving an only child to support the needs of aging parents. Unable to share care responsibilities, an only child may face inordinate physical and emotional stress as well as demands on their time and finances.

The majority of adult children who provide care are adult daughters. To support their parents, or even the parents of their partners, many women cut back on work hours, alter career paths to positions with fewer demands and less pay, or are compelled to step out of the workforce altogether. Each scenario presents near-term financial challenges for the caregiver and has long-term implications for ensuring her financially secure retirement.

A smaller future is about more than just fewer children. The percentage of households with only one person is among the fastest-growing household segments in the United States. Nationally, 29 percent of households are households of one, compared to 25 percent in 1990 and 18 percent in 1970. However, in many metropolitan areas, the percentage of people living solo is far higher. For example, according to the U.S. Census Bureau, people living alone make up 48 percent of households in Washington, DC, 47 percent in St. Louis, 41 percent in Minneapolis, and 36 percent in San Francisco. Figure 4 shows the rise of solo living from 1940 to 2022.

Living alone, whether by choice or the result of a life event, e.g., divorce or death, is not without costs and the need for planning. Younger people living solo face what some call a singles tax. One study conducted by Zillow suggests that a person living alone in a one-bedroom home may pay almost $7,000 more than a couple who can share the cost. Such costs skyrocket in large cities, where someone living alone might pay an average of $19,500 more than each member of a couple for the same one-bedroom home. Even a solo traveler paying for lodging on vacation will pay the price of double occupancy. (5)

The singles tax continues into advanced age. Tasks to maintain the home, often shared by two, become the job of one. In old age, those activities may become too difficult. What might have been possible with two may now have to be planned, financed, and outsourced to service providers.

The Future is Female

It is not gender that differentiates men and women as clients, it is their respective roles. According to Pew Research, women now outnumber men in the college-educated workforce. (6) Of men ages 25–36 in 2021, only 36 percent had a college degree compared to 46 percent of women. In 2023, young women comprised nearly 60 percent of college students nationwide.

Young women also are the first to leave home and start their own households compared to their brothers, who are more likely to remain at home with mom and dad. In fact, single women are more likely than single men to own their homes.

If a woman chooses a partner, she will play many roles that have profound financial impacts on the quality of life of her family and, in many instances, extended family. Women typically are the chief purchasing officers of the home. Nielsen estimates that by 2028 women will control 75 percent of discretionary spending. (7)

Women are reported to be key decision-makers in several major consumer markets, including groceries, consumer packaged goods, home improvement, and automobile purchases. Women are reported to make 90 percent of healthcare decisions for their immediate and extended families, e.g., insurance, physician choices, over-the-counter drug purchases, and senior housing arrangements for aging family members.

Numerous studies report that women are less confident than men about retirement. This confidence gap may be less about financial literacy than the lack of advisory content and planning addressing the roles and responsibilities most often shouldered by women in middle age and retirement. The absence of informed advice about the roles she fills daily and her future results in planning ambiguity that erodes her confidence.

For example, women are more likely than men to experience the uncelebrated realities of retirement not featured in retirement brochures. In midlife, women are likely to serve as caregivers to aging parents and in-laws, supporting them in both the "go-go" years and in the "no-go" years when they are in declining health. In older age, a woman is likely to provide care again, this time to her aging partner.

In a heterosexual couple, women are likely to live longer than their partners. So, a woman will effectively have two retirements: the retirement she shares with her husband and the more ambiguous one she is likely to live alone. Moreover, unless planned well, her second retirement likely will be hampered by lifetime income lower than that of comparable men—the result of compromising her career advancement to care for others during her adult lifetime.

The Future is Diverse

The racial and ethnic composition of the U.S. population continues to evolve. The non-white population is growing rapidly and comprises incredible diversity in country of origin, education, cultures, traditions, and income. As shown in table 1, the U.S. population can be broken down broadly by seven demographic characteristics. The greatest changes in the nation’s population profile are the percentage decline of the non-Hispanic white population and the increase of people identifying as Hispanic. Over the long term, by 2060 notable increases will be seen in the Asian population and the doubling of the percentage of people identifying as two or more races.

U.S. Census Bureau projections indicate the nation’s population will continue to grow, increasing by 25 percent between 2016 and 2060 to total more than 400 million people. This growth largely is due to immigration. Hispanics are the fastest-growing immigrant group in the United States. However, by mid-century the projected percentage of new Asian immigrants (36 percent) will surpass Hispanics (34 percent). Meanwhile, Black and white immigrants are likely to hold steady at about 9 percent and 19 percent, respectively.

However, broadly categorizing people as Hispanic or Asian masks important differences that may affect the type of financial and retirement advice people seek. For example, the more than 62 million people who identify as Hispanic are made up of 17 groups. People of Mexican descent make up more than half of the

U.S. Hispanic population and are concentrated primarily in the western United States. But many other Hispanic groups have significant numbers, different traditions, and are concentrated in other regions of the country. For example, nearly 6 million people identify as Puerto Rican. More than 7 million people identify as either Salvadoran, Dominican, or Cuban and live primarily in the northeastern and southeastern United States. Likewise, the nation’s 22 million people who identify as Asian come from nearly two dozen nations across eastern and southeastern Asia as well as the Indian subcontinent.

Moreover, people may identify as Hispanic or Asian, but they may have very different immigration stories. For example, people of Mexican and Puerto Rican descent have been part of the U.S. economic and social fabric for more than a century, and other Hispanic groups from Central America and South America are recent arrivals.

Similar diversity and nuance can be found in the U.S. Asian population. Of the more than 5 million people who identify as Chinese descendants, most were born in the United States; of the 1 million people who claim Japanese ancestry, only 27 percent are immigrants. In contrast, many Americans who identify as being Asian from southeast Asia or the Indian subcontinent are relatively recent arrivals. In fact, nearly seven in 10 Asian American adults were born in another country.

Most newly arrived and first-generation immigrants have little experience with employer-provided benefits, investing, the risk and volatility of markets, college savings funds, insurance, or retirement savings plans. Similarly, many—including first-generation college-educated groups, e.g., more than half of 25-plusyear-old Asians have a college education compared to 33 percent of the U.S. population— do not have a "retirement heritage"—that is, a family member who actually retired in the modern sense of the word. Consequently, they do not have a familial example for planning and living in retirement. These gaps in knowledge and experience are opportunities for financial services firms to engage, to educate, to develop innovative products, and to ultimately provide advice to rapidly growing mass middle- and affluent-market segments.

Conclusion and Implications

Demography may be destiny, but acknowledging change and the need for a new as they have for decades, to focus on the client they know—only to see their market share and assets under management slip over time. Other companies will race to respond and ultimately learn to anticipate the new needs of the new average client. What might some of those strategies entail?

• Radical segmentation. Previous financial services segmentation was relatively simple. Income was the primary variable that determined who clients were and what they needed. The new average client is much more diverse in preferences, lifestyles, and financial needs. Radical segmentation will require modified or entirely new suites of products, novel distribution strategies, creative brand imagery, and curated content to cater to many different segments. Few companies will immediately embrace radical segmentation, preferring the comfort, cost savings, and familiarity of working at scale. Unfortunately, that likely is to be yesterday’s scale. The new average makes working at scale harder to achieve but not impossible. Other industries already are addressing the challenge successfully. Consider how grocers have diversified to meet the demands of a far more pluralistic consumer market, or the vast number of hotel types under one master brand to meet the needs of a highly diverse traveling public. Financial services may find that evolving technologies, such as artificial intelligence, will provide extraordinary capacity to identify and serve the unique demands of microsegments of the population.

• Form multidisciplinary teams. Planning and advisory firms will find the need to expand their teams in the number of professionals, types of expertise, and lived experience. Broader discussions and addressing the unique needs of emerging client groups will take more time—time that a single advisor does not have. A longevity planning team approach that maintains the advisor in a traditional role of managing the client relationship will include other professionals, e.g., those that specialize in career transitions, caregiving, and multigenerational families, that can help clients anticipate and prepare for longer lives and a life that does not necessarily fit today’s model retirement (Coughlin 2019). Moreover, recruiting advisors and supporting professionals that authentically can reflect the lived experience of many clients, e.g., gender, race, and lifestyle, will demonstrate a necessary understanding and empathy with the new average client.

• Rethink life stages. Advisory models that rely on age, not stage, to predict what advice and what products should be introduced to a client should be rethought. Traditional life stages are being pushed out into older age or time within a stage is being extended. New life stages are emerging. Understanding where the client is, regardless of traditional models and dated cultural assumptions, is the new imperative for financial professionals and product innovators.

• Discover women hiding in plain sight. Despite being more than half the population, the roles that women play in households, extended families, and professionally remain nearly invisible to countless industries. Female roles and related concerns often are not reflected in today’s financial services and advice. Content that acknowledges women’s varied roles, conversations that demonstrate an appreciation of their unique challenges and concerns, and financial products that support women at every life stage will need to be developed.

• Identify financial heritage. Ethnicity, race, or education attainment may be poor predictors of financial knowledge, experience, and the type of advice clients may require. Newly arrived immigrants may be aluent and have experience as entrepreneurs, professionals, etc., and others may develop wealth in the United States but lack knowledge or, in some instances, trust in markets and unfamiliar institutions. In contrast, first-generation clients born in the United States that are college educated and high earners may not have any family members who have "retired"—they are, in effect, a new class of first-generation retirees. Financial product manufacturers will have to work with advisors to develop and deliver new content that recognizes the extraordinary differences within broad racial categories to fully engage this emerging class of new wealth.

Ideally the financial services industry, and advisory businesses in particular, may discover a common thread to help people live their best possible and financially secure lives as it did for yesterday’s average client. Until then, the demographic imperative, and today’s opportunity, is to learn how to weave many threads together to address a new and quickly emerging average client and help them prepare for every traditional, and evolving, life stage.

ENDNOTES

1.  See Pew Research, https://www.pewresearch.org/short-reads/2023/05/23/young- adults-in-the-u-s-are-reaching-key-life-milestones-later-than-in-the-past/.

2.  See Pew Research, https://www.pewresearch.org/short-reads/2023/05/03/in-the-u- s-and-abroad-more-young-adults-are-living-with-their-parents/.

3.  See National Center for Education Statistics,

https://nces.ed.gov/programs/raceindicators/indicator_red.asp.

4.  See Congressional Budget Office,

https://www.cbo.gov/publication/58912#_idTextAnchor001.

5.  See M. Backman, "Can You Afford to Live Alone? How to Avoid the Singles Tax,"

U.S. News & World Report (October 31, 2023), https://realestate.usnews.com/real- estate/articles/can-you-afford-to-live-alone-how-to-avoid-the-singles-tax.

6.  See Pew Research, https://www.pewresearch.org/short-reads/2022/09/26/women- now-outnumber-men-in-the-u-s-college-educated-labor-force/.

7.  See "Wise Up to Women," Nielsen (March 2020),

https://www.nielsen.com/insights/2020/wise-up-to-women/.

REFERENCES

Arnett, J. J. (ed.). 2015. The Oxford Handbook of Emerging Adulthood. Oxford University Press.

Chetty, R., M. Stepner, S. Abraham, S. Lin, B. Scuderi, N. Turner, A. Bergeron, and

D. Cutler. 2016. The Association Between Income and Life Expectancy in the United States, 2001–2014. Journal of the American Medical Association 315, no. 16: 1,750–1,766.

Christensen, K., G. Doblhammer, R. Rau, and J. W. Vaupel. 2009. Ageing Populations: The Challenges Ahead. The Lancet 374, no. 9,696: 1,196–1,208.

Coughlin, J. F. 2017. The Longevity Economy: Unlocking the World’s Fastest-Growing, Most Misunderstood Market. New York: Hachette.