As the number of retirees 75 and older grows, so do the financial risks they face, and many will be unprepared to address those risks.
That’s the conclusion of a new report from the Center for Retirement Research at Boston College.
“The future will see an increasing number of older retirees relying on relatively small 401(k) balances and on Social Security checks that do not stretch as far,” according to the report.
Citing research from the U.S. Social Security Administration’s Retirement Research Consortium, CRR identifies three primary financial risks that retirees 75 and older face: out-of-pocket medical expenses, financial mistakes due to cognitive impairment and widowhood. By 2040, roughly 43 million retirees will be 75 or older, almost double the 23 million projected for 2020.
Out-of-Pocket Medical Expenses
The report cites several studies about increasing out-of-pocket medical expenses for retirees 75 and older, with costs ranging from an average 20% of total income to as much as 142% for those who are 85 or older and in the top decile of health care spenders, including long-term care costs.
“The conclusion from these studies is that, to date, out-of-pocket costs pose a risk to some retirees but mainly to those in the tail of the distribution of costs.”
Still, “analysts expect out-of-pocket health costs to continue to grow faster than retirees’ income,” according to the CRR report.
Cognitive Decline and Financial Mistakes
“Financial skill tends to deteriorate for many in their 70s,” according to CRR. It often begins with minor misses like forgetting to pay bills, then gradually evolves to a complete inability to manage finances.
Having someone to help with finances can mitigate this problem, and that becomes more important “as less income comes from Society Security [due to the rising full retirement age] and traditional pensions,” according to the report.
Compounding the problem is the growing dependence of retirees on defined contribution plans, which many manage themselves and which are therefore more vulnerable to fraud than defined benefit pensions managed by former employers, according to CRR. In addition, “tomorrow’s retirees will have fewer children to support them than their parents did,” the report says.
The typical household nearing retirement has about $135,000 in 401(k) assets, which if annuitized, would provide about $600 per month, and one-third have no savings, according to the CRR report.
Widowhood is one reason Social Security checks won’t be as large for some many retirees — in addition to the rising retirement age.
Widows are entitled to the benefits they have earned based on their own work history, as well as survivor benefits, based on their deceased spouse’s work history — but they cannot collect both at the same time. Since women are working more and earning more relative to their husbands, more widows in the future will end up with less Social Security income than many had earned previously, due to Social Security’s arcane rules.
Their standard of living will be lower, and they will have to dig further into their other retirement savings. “Widowhood may affect women’s finances more in the future than it does today,” according to CRR.
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