We are all familiar with the phenomenon of an aging population in the U.S. Those in financial services are only too familiar with the harsh realities of that population’s lack of retirement readiness, such as the fact that 62 percent of pre-retirees have less than $100,000 in financial assets and less than half of pre-retirees are confident they will be able to live their desired lifestyle when they retire.
The coming “Silver Tsunami” is hardly a U.S.-exclusive trend. LIMRA examined retirement concerns of consumers in “younger” nations such as Brazil, Chile and Mexico. Traditional pension plans, government retirement benefits and personal savings/job earnings are the most common retirement funding sources in Latin America. Work-sponsored retirement savings plans, which have proven effective in the U.S., are less common in Latin America.
In Mexico, for example, only 14 percent of retirees have a work-sponsored retirement plan. These plans are growing as 39 percent of pre-retirees have enrolled or plan to enroll in a work-sponsored plan. Mexican consumers score the highest among Latin Americans in terms of product diversification and awareness. Mexican workers use a large variety of retirement funding sources and are more knowledgeable about what products are offered.
In Brazil, a considerable percentage the country’s gross domestic product is spent on providing guaranteed government benefits on which consumers rely for retirement funding. The ratio of active employees to pensioners is less than 5:1 and is projected to be close to a 1:1 ratio in 2050. Without more diverse product offerings, Brazil will have a tough time sustaining this program in its current state.
Latin Americans in general are not confident about their savings lasting through retirement, and pre-retirees are even more pessimistic. Half of them believe the outlook is so grim that they won’t even be able to afford day-to-day necessities.
Surprisingly, the greatest expressed concern about retirement life emerges from Chile, which has more experience with retirement planning than any other country in the Western Hemisphere. Chile established a national social insurance system in 1925 and designed its long-term savings plan in 1980. Many nations today still follow Chile’s lead. Their shift from a pay-as-you-go defined benefit system to a defined contribution system resulted in economic growth to the nation and will reduce long-term social security deficits. Yet Chilean pre-retirees are the most pessimistic of all the age groups. Pre-retiree doubt is influenced by the sentiments from current retirees, more than half of whom report that retired life is worse than what they had imagined.
Chilean employees deposit their social security money into individual retirement accounts, making a portion of each account vulnerable to market volatility. When respondents across Latin America were asked why they felt they wouldn’t have enough money in retirement, the Chileans’ top response was low investment returns. That’s a far different concern than in other countries, where respondents cited increases in the cost of living as their main concern.
As in the U.S., retirement is a top reason for saving in Latin America. But many in Latin America have unrealistic perceptions and lack product literacy. In the U.S., 71 percent of pre-retirees who work with an advisor said they are confident about having enough savings to last through their retirement. By contrast, Latin American pre-retirees report high levels of trust for advisors but are not very likely to seek out their advice.
For those doing business in Latin America, the retirement market represents an enormous opportunity. Although each country has its unique circumstances, one constant remains: people need help to plan for a secure retirement.