Financial assets are expected to play an increasingly larger role as a source for retirees’ income, which increases their financial fragility, according to the Center for Retirement Research.
In its latest report “Will the Financial Fragility of Retirees Increase?” CRR notes that the “increased dependence on financial assets” makes retirees more vulnerable to market downturns, especially if they have inadequate savings.
Retirees are becoming more dependent on financial assets to maintain their standard of living because of the shift in retirement savings from defined benefit pensions to defined contribution plans and because Social Security is expected to replace a smaller share of earnings due to the increase in the full retirement age (now 67 for those born between 1960 and 1967), according to the report.
Gen Xers and trailing boomers, the youngest boomers born between 1956 and 1964, are potentially the most vulnerable because they are the most dependent on financial assets as a share of their income at age 67, according to the report, which cites a 2012 study by Barbara Butrica and Karen Smith of the Urban Institute and Howard M. Iams, a researcher at the Social Security Administration.
Financial assets account for roughly 85% of the income of the wealthiest Gen Xers and trailing boomers, according to that study. The comparable share for middle-income Gen Xers and trailing boomers is about 40% and for low-income Gen Xers and trailing boomers 27% and 20%, respectively.
Also vulnerable are those retirees who haven’t saved enough during their working careers to support a certain standard of living in retirement, and their numbers are growing, according to the report. “Retirement incomes going forward will replace a smaller share of retirement incomes than they do today.”