Material Risks for Individuals

A factoid you probably will wish you hadn’t heard: In Japan adult diapers outsell baby diapers. And have since 2016. The U.S. will follow suit this decade. This is a vivd introduction to a critical risk for financial planning: demographics.

For individuals who have decades before retirement, the material risks are the ones that are systemic over the longer timeframe, and here demographics takes it place along with climate change and deglobalization. (A wild card I add to the group is AI.) Because the focus at Fabric is on individuals and financial advisors, we’ve spent a lot of time bringing models to bear to look at the progression of material risks over the longer term.

Climate change stands out as existential. The move away from globalization stands out for being far-reaching economically. Demographics stands out in two ways.

First, demographics is the most predictable. Adjusting for expected immigration, we know today the working cohort of the population thirty years from now. Adjusting for changes in longevity, we also know the aged cohort of the population thirty years from now.

Two well-known demographic issues, here for the U.S., but it’s the same story for most all developed countries, Japan on the extreme, and China revving up to be not far behind: The ratio of workers to retirees is dropping. 

Along with this — and in part because of this — life expectancy is growing. 

Second, Demographics is a risk that affects both sides of an individual’s risk equation. It affects the value of the portfolio. And it affects the financial plan.

On the portfolio side, the lower birth rate coupled with increased longevity has economic implications, already being seen in, for example, Japan. A smaller work force affects production. A larger aged cohort versus working cohort puts strains on social resources like social security and health care. On the financial planning side, while we can celebrate our prospects for a longer life, it amplifies the risk because retirement savings have to stretch out longer.

What is wrought by demographics?

Here is something I wrote recently on demographics, specific to China. Not a pretty picture. And getting back to diapers, here is a NYT article on the challenges Japan is facing on diaper recycling.