Most current retirees appear able to withstand some type of financial shock. Future retirees may have more difficulty doing so due to changes in the retirement system, says a research fellow at the Center for Retirement Research (CRR) at Boston College.
Financial shocks are primarily described as a spike in medical expenses or a sharp drop in income. The latter most often occurs when a retiree is widowed. Following the death of a spouse, Social Security benefits are reduced along with pension benefits (if the deceased had access to one).
While a drop in income can create problems, a 2009 study found that most retirees do not forgo needed food or medication. A separate study found that non-medical spending increases following a health shock. (Public and private insurance helped to cover the cost of the medical expenditures.) Combined, the studies found most widows to have sufficient reserves to maintain their standard of living.
Future retirees may have a tougher time absorbing such shocks. The transition from pensions to 401(k) plans is leading to a greater reliance on personal savings. A 2012 study found personal financial assets accounting for just 42% of retirement income for Gen-Xers in the middle-income range, assuming 80% of financial assets are annuitized at retirement. Projections cited by the CCR paper suggest retirement replacement rates could be 9% lower for middle-income Gen-Xers relative to recent retirees. The paper’s author further cautions that these numbers could be conservative since many retirees may not annuitize or be able to do so at actuarially fair rates.
Future retirees also face the potential problem of a big financial shock occurring early in retirement. If forced to withdraw more than planned from their savings to cover expenses, they would increase the risk of incurring financial hardships later in life. There is also the possibility of a sharp downturn in the financial markets occurring soon after retirement, making difficult choices about managing savings even harder.
CCR suggests that households approaching retirement consider both increasing how much they save and reducing fixed expenses, especially by downsizing. Working longer, annuitizing wealth and using reverse mortgages are also suggested.
Source: “Will the Financial Fragility of Retirees Increase?,” Steven A. Sass; Center for Retirement Research at Boston College; February 2018, Number 18-4.
Financial Planning
Financial Planning
Financial Planning