Hello, and welcome to Investor’s Bookshelf.
The book I’m going to unpack for you today is titled Financial Gerontology.
What is financial gerontology?
It lies at the intersection of gerontology and finance.
Gerontology mainly studies how human beings and human societies can better adapt to population aging.
So why combine gerontology with finance?
It’s because, when people used to talk about aging, they focused more on older adults’ “healthy life expectancy”—that is, how many years they can live safely and in good health.
Financial gerontology, while paying attention to healthy life expectancy, also focuses on older adults’ “asset longevity,” that is, how to ensure that as they live longer and stay healthy, they need not worry about running out of money.
Financial gerontology became a formal academic field in the late 1980s and has drawn growing attention in recent years.
A major reason behind this is that, in recent years, population aging has become increasingly pronounced worldwide.
From 1950 to 2017, global life expectancy for men rose from around 48 to around 70, and for women from around 53 to around 76.
Given current trends, human life expectancy is expected to continue rising by about two to three years every decade.
At the national level, more and more countries are entering what this book calls an “aged society,” meaning a society in which people aged 65 and over account for more than 14% of the population.
According to United Nations data, major European countries such as the United Kingdom and France became aged societies in the 1970s; Japan did so in 1994, and the United States and Canada around 2010.
China’s Seventh National Population Census in 2021 shows that China has now entered an aged society.
For each of us, both health and assets are crucial in later life, as they significantly affect our quality of life.
Therefore, today it is very necessary to understand financial gerontology and how to extend both our healthy life expectancy and our asset longevity.
The author of this book is a well-known Japanese scholar, Atsushi Seike.
He is the president of Keio University and the president of the Japan Society of Human Resource Management, with deep expertise in financial gerontology and labor economics.
As noted, Japan entered an aged society in 1994, more than a decade earlier than the United States and Canada.
After entering this stage, Japan’s society and economy underwent profound changes.
Thus, Japan is an excellent case for observing an aged society, and learning from Japanese scholars’ research on health management and asset management in such a society can inspire us and help us better respond to the trend of population aging.
In today’s walkthrough, we will follow the main thread of the original book and discuss, separately, health management and asset management in an aged society.
These topics are closely related to everyone who already lives in—or is about to enter—an aged society.
Part One
Now we enter Part One to discuss health management in an aged society.
In an aged society, the purpose of health management is to extend people’s healthy life expectancy as much as possible.
Here we should note that healthy life expectancy is not the same as lifespan.
Lifespan refers to how long we can live, whereas healthy life expectancy refers to how long we can live in good health and independently.
At present, the factors that affect people’s healthy life expectancy fall mainly into two categories: first, declines in physical function, including reduced strength and the onset of various physiological diseases; and second, declines in cognitive function, including the appearance of conditions such as dementia, hallucinations, delusions, agitation, and cognitive impairment.
The author believes that, compared with declines in physical function, declines in cognitive function among older adults pose a greater challenge for an aged society.
The first reason is that normal declines in physical strength do not greatly affect older adults’ daily lives; many mild to moderate physiological diseases only affect specific aspects of life and show clear improvement with treatment.
However, declines in cognitive function affect all aspects of life, leading to an overall drop in quality of life, and many cognitive disorders cannot be cured; whether by drug or non-drug therapies, the best we can usually do is to slow the progression rather than eliminate it.
In addition, as population aging deepens, the number of people with declining cognitive function will increase at an accelerated pace.
In 2021, the number of people in Japan diagnosed with dementia was about five million, and by 2025 that figure is expected to surpass seven million.
According to studies by Japanese scholars, for older adults, every additional five years of age doubles the probability of developing dementia.
A research institute under Japan’s Ministry of Health, Labour and Welfare estimates that by 2050, one in five people aged 65 or over in Japan will have dementia.
Beyond that, many older adults suffer from mental health conditions such as depression, delusions, and agitation.
Declines in cognitive function among the elderly not only affect their own quality of life but also inevitably increase the socioeconomic burden.
From the perspective of financial gerontology, this mainly includes two aspects.
First, in an aged society, a large share of financial assets is held by older adults.
Managing these assets requires sound cognitive abilities.
Common financial transactions such as deposits and withdrawals, securities investment, and purchasing insurance all require the individual to make reasonable judgments.
However, as cognitive function declines in later life, the ability to manage one’s own assets also declines.
If assets are not properly arranged and settled in advance, then when cognition deteriorates beyond a certain point, a great deal of money may fall into a “frozen state.”
According to Nikkei, by 2030 the assets held by older adults with dementia in Japan will rise to 215 trillion yen, equivalent to about 40% of Japan’s GDP.
A large portion of these assets will end up in a “frozen state.”
From a societal standpoint, funds that cannot function as resources participating in economic circulation have a significantly adverse impact on economic development.
Second, declines in cognitive function among older adults drive up the costs of elder care.
At the household level, older adults with cognitive decline—especially those with dementia—require around-the-clock supervision and one-to-one care.
If family members provide the care themselves, many people in their prime will have to quit their jobs to look after relatives with cognitive decline.
At the macro level, this reduces the labor force and greatly lowers the economy’s potential growth capacity.
Moreover, whether family members provide care or professionals are hired, the expense is substantial.
According to data collected by the Alzheimer’s Association in 2020, the average medical and care costs for people with dementia are more than three times those for people without dementia.
In addition, Japanese data show that as the number of older adults grows, caregiving expenses rise faster than the elderly population itself.
This is because, as aging deepens, the number of older adults with severe cognitive decline also increases, and their care costs are far higher than those with mild decline.
Furthermore, in an aged society, the price of human labor rises, and the cost of care services rises along with it.
Multiple factors overlapped together cause total caregiving costs to grow faster than the number of older adults.
This imposes a considerable burden on both households and the broader economy.
Therefore, health management in an aged society is extremely important, both from the standpoint of public health and from the standpoint of the national economy.
As noted earlier, the goal of health management in an aged society is for older adults to achieve long life in a healthy state, not mere longevity.
The methods mentioned in the book for helping older adults achieve healthy longevity can be roughly divided into two types.
The first is prevention: starting from youth, paying attention to preventing diseases that may arise from poor lifestyle habits, and avoiding illness in old age.
This is indeed the royal road to extending healthy life expectancy and needs little elaboration.
The second approach is supplementation: helping people who have already entered, or are about to enter, old age to make up for declines in physical and cognitive functions.
In recent years, with advances in regenerative medicine, it has become possible to regenerate damaged tissues or organs and restore—or partially restore—lost bodily functions.
In addition, ongoing academic research in brain science and robotics is producing machines that can interface with the human body to replace lost bodily functions.
However, when it comes to cognitive decline, as noted above, no method has yet been found that truly restores cognitive function; at most, medical interventions can slow the decline.
Therefore, responses to cognitive decline are still mainly about preventive measures in advance and care afterward.
Studies show that daily exercise and maintaining a certain level of physical activity not only help prevent cognitive decline but can also slow the rate of decline even after it has begun.
The problem, though, is that many older adults experience a sharp drop in motor ability once cognitive decline sets in, and exercise is something that is difficult for others to carry out on one’s behalf.
To address this, Japan has begun applying “exercise-substitution” technologies.
For example, older adults can wear assistive movement devices that function somewhat like a human skeleton; when the machine moves, the person moves with it.
In addition, brain–computer interface (BCI) technologies can connect the brain to a computer, which can activate motor commands in the brain and drive the body to move.
Beyond exercise, as mentioned earlier, thoughtful care is also crucial for older adults with cognitive decline, but human caregiving is very costly.
A practical solution to this problem is likewise to harness technology.
For daily living, some Japanese technology companies have developed robots that assist older adults with eating and with getting up and walking.
Panasonic has introduced a robot that can transform directly from a bed into a wheelchair and also has a turning function to prevent pressure ulcers in older adults.
Sumitomo Riko has produced the ROBEAR robotic care bear, which can give early warnings when an older adult’s sleeping posture is unsafe to prevent falls and fractures, and can also monitor clinical indicators such as breathing and heart rate.
On the social side, robots have already appeared that help older adults with cognitive decline communicate with others.
In addition, in the past two years a therapeutic robot called PARO has gained attention in Japan; shaped like a seal, it can engage in remarkably lifelike interaction, and studies have shown that it reduces feelings of loneliness in older adults and has a calming effect on those with dementia.
As we can see, these technological advances that improve the quality of life for older adults are already being applied in concrete ways today, and their global spread and declining costs are just around the corner.
Part Two
Having covered health management in an aged society, let’s now talk about asset management in an aged society.
The goal of asset management in an aged society is to ensure that older adults’ asset longevity can cover their entire lifespan—in other words, that they always have controllable assets to support a normal life.
To achieve this, the first issue to address is the “frozen funds” problem we mentioned earlier, which can arise because of cognitive decline in later life.
Here, “frozen” does not mean that financial institutions shut down the elder’s accounts; rather, it means that because the older person has lost the ability to manage assets and no one else can act on their behalf, many assets remain locked in accounts and enter a quasi-frozen state.
The frozen assets are not limited to savings deposits.
Many older adults have been investing for years, habitually managing their own stocks, mutual funds, insurance, or other financial products.
If sudden cognitive decline occurs, these assets may all become frozen.
Solving this problem requires joint action by older adults themselves and the broader financial system.
For older adults, it is important to prepare in advance.
While still in good physical and mental condition, they should review their asset and medical information, decide in advance who will be entrusted with different asset permissions when they can no longer make independent decisions, and put these decisions into written documents or make sure those around them are aware.
In our country this practice is still relatively uncommon, but in some countries with deeper aging it is common and encouraged.
There is also educational outreach and support for such planning.
For example, in the United States there is a well-known nonprofit organization called AARP, with 38 million members.
It once published an introductory guide specifically for older adults on advance asset planning.
The book lists what points seniors should consider and what steps must be taken when planning asset delegation, and it urges parents to proactively raise these topics with their children.
Moreover, some financial institutions in other countries are starting to take cognitive decline into account when providing services.
For example, Mizuho Bank in Japan launched a “dementia trust.”
Older adults can entrust part of their assets to the bank for safekeeping in advance.
If they are later diagnosed with dementia, their own ability to spend those assets is limited to prevent irrational transactions or losses.
Family members or agents can manage these funds on the elder’s behalf, but the bank checks the purpose of every disbursement to prevent misappropriation or abuse.
In this way, even if cognitive function declines, the elder’s assets are not frozen and can still be used for their own medical expenses, care costs, and living expenses.
This type of trust mainly targets older adults’ savings, but for investment assets, artificial intelligence can help monitor and assist with management.
AI can learn a person’s past transaction data to understand risk preferences and trading habits.
If the older adult entrusts an account to someone else and that person manages the assets in a way inconsistent with past patterns or takes on excessive risk, the AI can trigger safety measures and stop the transactions in time.
If malicious misuse occurs that violates the elder’s wishes, the AI can also submit the agent’s trading records to a court or other third party for review.
So far we have discussed how to prevent asset freezes due to cognitive decline.
Beyond that, a more pressing issue for older adults is how to avoid asset depletion late in life.
Although our country and many others have lifelong pension programs, relying solely on pensions may only cover basic living expenses and not additional costs such as late-life care.
As life expectancy increases, we must find ways to extend asset longevity and manage wealth across the entire life cycle.
This book provides some asset management strategies, but they are mainly tailored to developed countries with deep aging such as Japan.
Therefore, in this section I will also draw on a Chinese publication, The Longevity Era, to explain how, as society ages and personal life expectancy rises, we can accumulate wealth with a full life-cycle perspective.
The Longevity Era proposes a clear framework: whether for society or individuals, accumulating wealth is like filling a reservoir.
The amount of water a reservoir holds depends on its length, width, and height.
Similarly, the amount of wealth reserves depends on three factors: time horizon, principal contributions, and the rate of return.
So, to increase retirement wealth, we should consider these three factors.
First is increasing the length of the reservoir, which corresponds to extending the time for wealth accumulation.
This period runs from when we begin saving in youth to when we retire and stop creating wealth.
Following this definition, the ways to extend this time are clear.
One is to start saving as early as possible.
If retirement age is fixed, the longer we expect to live after retirement, the earlier we should start saving for retirement.
Another way is to delay retirement.
Here, “retirement age” refers not to the statutory age but to the moment we stop creating wealth.
Public health research shows that today’s older adults are in much better physical condition than their predecessors.
Seventy- or eighty-year-olds today have physical fitness comparable to 60-year-olds thirty years ago.
This means many older people who retire at 50 or 60 still have the energy, ability, and desire to keep working and creating wealth.
In such cases, it’s worth seeking suitable opportunities to continue doing manageable work to supplement savings.
Many countries with advanced aging have begun to raise the statutory retirement age and encourage companies to provide jobs for those who wish to work up to age 70.
That covers increasing the reservoir’s length—extending the time for wealth accumulation.
Next is increasing the reservoir’s width, which means increasing principal contributions.
Principal contributions are closely tied to income, and for most people the key to increasing income is to enhance human capital.
Human capital refers to the capital embodied in workers—knowledge, skills, cultural and technical levels, and health status.Many studies show that raising educational levels promotes career development and higher wages.But accumulating human capital is not limited to obtaining higher degrees.In The 100-Year Life, which we previously discussed, the authors emphasize that as life expectancy rises, the ability to reinvent oneself will become everyone’s primary survival skill.This means we must become accustomed to saying goodbye to our past selves, daring to let go of outdated experience, and continuing to learn and embrace new things, constantly updating our knowledge and experience systems.In a 100-year life, learning will be a lifelong task.For example, more people will enter and leave university multiple times, earn multiple degrees, and explore multiple disciplines.Fragmented learning has also become a major way to accumulate human capital, and its importance will only grow.
Finally, let’s talk about increasing the reservoir’s height—that is, raising the rate of return.
Here, improving returns does not mean blindly chasing high investment yields; rather, it means appreciating the power of compound interest.
We have all heard much about this.The famous investor Warren Buffett once compared compound interest to a “snowball,” rolling and growing to accumulate great wealth over time.
There is a simple rule of thumb for estimating compound growth: the Rule of 72.If your pension investments earn an average annual return of 8%, it will take about 72 ÷ 8, or roughly 9 years, to double.If the average annual return is 6%, it will take about 12 years to double.
However, the compounding effect comes with conditions.
First, it requires a sufficiently long investment period.
For example, with an annual return of 5%, if you invest for 50 years, your assets grow to about 11.5 times the original amount, but nearly half of that growth occurs in the final 10 years, while the first 10 years contribute only about 6% of the total gain.
That’s why people often say compound interest is the friend of time.
We must also note that during long-term compounding, the volatility of investment returns cannot be too high, or the power of compounding will be greatly weakened.
A simple example: two young investors start with the same principal.
One earns a steady 5% return every year; the other earns 15% the first year but loses 10% the second year, and continues with that pattern for 50 years.
In the end, the steady investor’s assets grow about 11.5 times, while the volatile investor’s assets grow only about 2.36 times—far below the steady investor’s result.
Conclusion
That brings us to the end of today’s main content. Let’s summarize:
Financial gerontology is an interdisciplinary field that combines gerontology and finance.
While focusing on older adults’ healthy life expectancy, it also emphasizes their “asset longevity”—that is, how to ensure that as people live longer and stay healthy, they always have assets they can control to maintain a normal life.In recent years, as global aging trends have become more pronounced, financial gerontology has attracted increasing attention.
In an aged society, the goal of health management is to help more older adults achieve long life in a healthy state.Compared with declines in physical function, cognitive decline in older adults presents a greater challenge both for the individuals themselves and for society as a whole.
It not only causes a comprehensive drop in quality of life and triggers asset freezes, but also brings heavy caregiving costs.
The book mentions two ways to help older adults achieve healthy longevity:
first, prevention—starting in youth to avoid diseases caused by poor lifestyle habits;
and second, supplementation—helping those already in or entering old age make up for declines in physical and cognitive function.In an aged society where labor costs continue to rise, using technological innovations to assist and care for older adults has already become a necessary choice.
In an aged society, the purpose of asset management is to ensure that older adults’ asset longevity covers their entire lifespan.In this part we discussed how to prevent frozen funds caused by cognitive decline and how to avoid asset depletion late in life.
As societies age and individual life expectancy grows, we need to accumulate wealth with a full life-cycle perspective.For both society and individuals, accumulating wealth is like filling a reservoir.The amount of water it holds depends on its length, width, and height.Similarly, the amount of wealth reserves depends on three factors: the time horizon, the size of principal contributions, and the level of returns.Therefore, to build retirement wealth, we must think about how to extend the accumulation period, increase principal input, and improve returns.
In the industrial era, aging was often seen as something negative.
But today, aging has become a global “new normal.”
As we learned in this discussion, ever-lengthening life expectancy brings many new challenges.
Thus, each of us needs to reexamine and plan our own healthy life expectancy and asset longevity, and embrace this new normal that has already arrived.
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