What Is Ahead For Personal Finance?
When the words “innovation” and “economy” are used in the same sentence, it is usually in the context of items which have made significant contributions to the world and made lots of money in the process. Think the iPhone, iPad, hybrid automobiles and pharmaceutical breakthroughs such as anti-depressants and cholesterol-lowering drugs.
But as the
Financial innovation has gotten a bad reputation, thanks in no small part to some of the things which helped bring about the 2008 financial crisis. Terms like “collateralized debt obligations” and “credit default swaps” are enough to leave even the savviest of investors scratching their heads.
Much of what we call financial innovation is nothing more than coming up with clever ways to re-name money, so that financial institutions, corporations and the government can avoid restrictions imposed by regulations. Wall Street wizards used mathematically sophisticated trading strategies to make enormous leveraged bets, some of which paid off in a spectacular fashion and others which failed in an equally spectacular manner.
Taking the Good With the Bad
No one can dispute that some financial innovations have improved the day-to-day lives of the overwhelming majority of us. Things like credit and debit cards, money market mutual funds and exchange-traded funds (ETFs) and many, many others have all made it much easier to manage and save our money.
An aging population, globalization and advances in IT are all factors which have combined to inspire individuals to assume greater control over everything from saving for retirement to paying for college.
The future portends simplification, to contrast with the confusing array of products which have been conjured up by the financial services industry. Innovation will be utilized to help us better manage risks, such as a drop in income and making sure you will never run out of money. The next phase of financial innovation has been called the financial innovation “the democratization of risk management.”
The Retirement Conundrum
The fact that Americans are getting older and living longer is no big secret. There is a general consensus that many people have not saved enough for retirement, as many employers have eliminated traditional pensions in favor of voluntary 401(k) plans which offer uncertain returns. Experts have said that the average couple will be about $250,000 short of what they need to retire comfortably. Prospective retirees are having a hard time figuring out how much they should withdraw from their retirement savings as they get older. If you spend too much at first, you could end up struggling later on. Conversely, if you are a spendthrift, you will probably not outlive your assets.
Wall Street types and other financial experts are creating tailored retirement portfolios which offer long-term returns based on the answers to questions about things like income and retirement age. When you reach retirement age, lifetime income annuities will provide a hedge against inflation and rising healthcare costs. You will be able to receive automatic updates on your portfolio and standard of living on your cellphone.
It has also been proposed that the federal government issue inflation-adjusted annuities to retirees, along with annuities which hedge against health and long-term care spending risks. The idea is that if you have simple products which address longevity, credit, inflation, and other risks you could spend less time worrying about retirement security.
Information technology advances will make it easier for retirees to monitor their investments, savings and other vital financial information on a real-time basis, in the comfort of their living rooms and kitchens. Having this much detailed information available so handily can only help retirees make better-informed, nimble decisions about their finances, which will lead to happier retirements.
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