The Internet and Retirement

May 10th, 2010

Some aspects of retirement are eternal and immutable. In other ways, today’s retirees are unlike any others in human history. Living standards depend on productivity, which is spearheaded by technology. Current retirees benefit from a technological revolution of staggering breadth and depth. The Internet provides the nexus to that revolution.

The Internet as Shopping Mall

If the Internet did no more than serve as a mobile shopping mall for retirees, its impact would be dramatic. Aging makes it progressively more difficult for retirees to travel and transact outside the home. Economists describe these difficulties as “transaction costs.” They consist not merely of the pecuniary expenditures of travel – gas and depreciation for travel by personal auto, fares for travel by mass transit, taxicab or other for-hire medium – but also of its physical discomfort as well. By effectively eliminating these costs, the Internet lifts a large burden off retirees’ shoulders.

The Internet as Home Banking Center

Previously, banks were a key destination in the daily lives of retirees, whose visits allowed them to acquire cash, double-check their account balances, open saving or investment accounts, solicit answers to their financial questions, and even find companionship in conversation with employees. The Internet enables retirees to perform most of these tasks from their home and vitiates the necessity for the rest. This dovetails with banks’ business plan, which is to substitute capital for labor by reducing staff and assigning their functions to ATMs and websites.

Human interaction is the sole benefit for which the Internet cannot provide a perfect substitute. It may be tempting to editorialize about the alienating and dehumanizing effects of technology, but the fact is that the Internet (along with cell phones and other technological artifacts) can partially offset the loss of social contact. E-mail and text-messaging may be associated with the young, but they work just as well for retirees.

This just ripples the surface of the vast reservoir of Internet benefits. The most important benefit of all is the information made available on the Web.

The Internet as Information Source

The Internet is far and away the largest and fastest information source in human history. Retirees’ need for information is even greater than it was during their working lifetime. While their occupational use of the Web is obviously reduced or eliminated altogether, this is more-than-counterbalanced by retirees’ need for other kinds of information.

Retirees no longer spend one-third to one-half of their day working to earn income for consumption. Now they devote their entire day to consumption. The Web can provide the information they need. If they want to go out to eat, they can learn what restaurants to patronize, what foods to order, what times are available, and what the meal will cost. If they want to attend a movie, they can locate the best choice, obtain directions to the theater, and discover show times and prices. If they want to plan a daytrip, the Web will confide likely destinations, routes, and transport options. If they want to find a bridge game, the Web will list duplicate games in the local unit and contact-names and numbers for the directors. If they need transportation, the Web will give them options ranging from taxicabs to public transport.

Medications play a progressively larger role in retirees’ lives over time. The Internet not only allows them to order medications at lower prices than those charged by physicians, hospitals, and pharmacies, it also provides an in-home medical reference  in which to learn the ingredients, properties, and side effects of current medications and uncover new ones.

The Internet and Retirement Finance

Wealth and investment are a daily preoccupation to retirees, who no longer rely upon earned income to finance their lives. Here the Internet plays its greatest role. Retirees can effect banking and brokerage transactions on the Web. They can uncover timely information about market prices and volumes for real and financial assets ranging from land to forward markets for foreign exchange.

Before transacting, people ought to know what they are doing. It is just here that the Internet’s role becomes critical.

The Internet and Financial Education

We are accustomed to viewing education as both an urgent need and a benign force. The Internet reminds us of the equivocal nature of education.

Suppose a retiree is beset by uncertainty about the size of his wealth. He is uncertain whether it will last for his entire lifetime. He longs for the security of a guaranteed lifetime income.

A Google search will pinpoint the asset specifically created for his purpose – an annuity. It will define the term, recount some history, list the various types, and provide the names of issuing insurance companies.

But the Internet will not stop there. Websites and bloggers will expound endlessly on annuities. They will debate their merits and decry their deficiencies. They will deplore the shortcomings of variable annuities and the complexities of indexed annuities. They will fail to distinguish between fixed and variable, between deferred and immediate, between nominal and real (inflation-adjusted). In short, they will dump everything but the kitchen sink into their presentation and leave it to the reader to sort the wheat from the chaff.

The temptation to take everything on the Internet at face value is insidious. The newness of the medium, the cocksureness of its practitioners, its authoritative look – all these are traps for the unwary.

There Is No Such Thing as a Free Lunch on the Internet

Despite the youth and glamour of the Internet, its tradeoffs are as old as economics itself. The overriding one is between price and quality. Today, Internet users can obtain – free of nominal charge – information that would have cost plenty in former years. The very ease with which information can be delivered and accessed, however, compromises its quality.

Because the Internet is such a cheap and easy delivery vehicle, everybody and his brother-in-law succumbs to the temptation to tell the world what they know – or think they know. Formerly, only those people who had reason to expect their information to be worth the (higher) costs of delivery had an incentive to deliver it. If the relative magnitude of costs and benefits was unclear, the market soon clarified the situation. People whose information was trivial or too costly went broke, after which their informational messages ceased.

Today, worthless or trivial or too-costly information flows persist indefinitely because there is no deterrent feedback from consumers. This puts Internet users at the mercy of their own instincts and judgment about what sources to patronize and what to believe. Can I really make a fortune trading stocks or foreign currencies – in just my spare time?

Can I cure my runaway lipid levels, depression, or high blood pressure quickly and surely, without benefit of medication?

Retirees are uniquely at risk. They are completely dependent on their wealth. Wealth provides the means with which they satisfy all of life’s ends. Their remaining time on Earth is dwindling. Thus, they are badly placed to resist far-fetched plans to improve their welfare.

Retirees do not pay a high monetary price for what they receive from the Internet. Instead, they bear a high risk of loss due to that information.

Buying Insurance Against the Internet

The orthodox way to cope with risk is to insure against it by incurring cost; that is, by purchasing insurance. In this case, retirees can “buy” insurance without depleting their financial assets. They can take the time to double-check, vet, and verify any information that bears on their wealth. By doing so, they incur an opportunity cost. Since they no longer work, this opportunity cost is not the wage or salary they forego. Instead, it is the time spent on verification – time that could alternatively be spent consuming goods and services.

There is a presumption nowadays that government should somehow protect citizens against risk. In practice, this presumption leads either to a regulatory stranglehold that forestalls the promised benefits of the regulated activity, or to a complacent citizenry who assumes that government has somehow removed the risk from life.

Rather than demanding a free lunch, retirees should sample the Internet smorgasbord to their heart’s content – but be ready to pay for the privilege.

Category: Annuities, Economic Analysis, Fixed Annuities, Indexed Annuities, Retirement Planning, Risk, Technology, Variable Annuities | Tags: , , , , ,

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