A growing number of retirees face a financial crisis when their Social Security benefits decrease after their spouse dies.

My local paper, the South Florida Sun Sentinel, ran in-depth coverage at the end of last year called the “Hidden Hungry” by Diane C. Lade about food insecurity issues and poor diets facing elderly populations in South Florida. While many reasons were cited for this, the underlying reason was poverty.

In South Florida, the number of older residents as a percentage of the overall population is skyrocketing. As the fastest growing segment, between 2000 and 2010 according to the recent census, the number of Floridians age 85 and older grew by 31 percent to just over 400,000 individuals. By comparison, the number of Floridians age 65 and older grew 16 percent to just over 3 million. Often, individuals retire to Florida with a two income (Social Security) household but find after one dies that the remaining single Social Security income is insufficient to support the survivor.

Many of the personal stories related in the article were about individuals that found their economic class status had diminished over time. Many cited being squeezed by ever-escalating health care costs and the need to put food on the table. The overriding financial thread in this tapestry of despair is: the only form of wealth keeping these individuals from becoming completely dispossessed is their Social Security income. Why is that? Because it’s annuitized wealth, that’s why!

Yet many individuals highlighted in this article were, at one time, in the solid middle class, sporting good jobs, incomes and assets. But now in their 70s, 80s and even 90s, they have run into unexpected obstacles in the “life happens” category. The primary obstacles sited were:

  • Living longer than expected
  • Outliving their savings
  • Non-escalating Social Security incomes (low recent COLAs)
  • High rates of isolation
  • Homebound or disabled
  • Healthcare adverse event(s)
  • Extremely low interest rates (10 years and counting)

These households’ non-annuitized wealth was insufficient, for all or some of the above various reasons, to maintain their living standards. Consequently, after dissipating — often in the form of a creeping gradualism — non-annuitized wealth and losing annuitized wealth in the form of lost Social Security benefits (when one spouse dies), many former middle class and now retired individuals are facing a financial income jam of epic proportions.

Given the above; overall, annuitized household wealth levels are just too darn low. Immediate annuities (SPIAs), deferred income annuities (DIAs) and reversionary annuities (RAs) — aka survivorship income policies — are just as much about a defensive financial posturing for very long-term protections as they are about lifetime income. Yet, when the opportunity to add SPIAs, DIAs and life insurance reversionary annuities to annuitized wealth holdings presents itself at earlier ages — 40s, 50s and 60s — when assets are sufficient to afford such purchases, many times such opportunities is lost. They are lost because consumers have not been sufficiently counseled by convincing agents regarding the long-term importance of such actions. Agents can’t just give good reasons to annuitize wealth; they need to give compelling reasons. And if facing a potential future existence of poverty and the fact that mortality pooled annuities and reversionary annuities on the life insurance side of the coin work to help alleviate these risks to insulate consumers from living subsistence lifestyles because they are permanent products isn’t compelling enough, then I don’t know what is.

Immediate annuity and newer deferred income annuity contract premium remains the smallest segment of the annuity business. Reversionary annuities are so underutilized, I don’t think any industry organization or tracking agency even keeps sales tabs on them. Yet for various reasons, deferred annuity contracts and traditional life insurance policies continued to be sold by agents and purchased by consumers without any regard to how well these traditional products will stand up under consumer contemporary financial pressures. In other words, will a deferred annuity with a GLWB rider really stay in-force and not become dissipated or will that life insurance policy really not lapse with little to no “end” value over the next 30 years or so?

General financial portfolios (stock/bonds) and cash value insurance products’ ultimate lifetime benefit/resilience, in the long run, will depend upon the retiree’s own experience over the intervening 20 – 30 retirement years as much as it will depend on the financial performance of the product itself. Consequently, following a bad consumer experience, if the financial product sticks around it will depend on its design. For the average person/household, mortality pooling is a way to make sure dependable income happens.

See also:

There is a retirement savings crisis – and FIAs can help

3 tips for men to avoid poverty in their golden years

Annuities for retirement income

 

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