Financial Fragility

The Center for Retirement Research at Boston College has come out with another piece measuring the current state of our retirees.  BC does a great job in this area, and we often use them as our go-to source for pension-related information. The article is titled, “Will the Financial Fragility of Retirees Increase?”

Here are the brief’s key findings:

  • Retirees have long been seen as financially fragile – that is, ill-equipped to handle a financial shock without severe hardship.
  • Interestingly, the research suggests that the vast majority of current retirees can weather shocks such as high medical bills and widowhood.
  • Future retirees, however, face greater risk as most people are not saving enough and it is hard to manage a nest egg.
  • The best responses are to reduce fixed expenses (e.g., downsize) and draw more income from assets (e.g., buy an annuity).

We are actually surprised to read that a majority of current retirees can handle either widowhood or a financial shock such as a high medical bill.  However, a “high” medical bill is measured as a $400 surprise expense, which doesn’t seem like that would be a shock to one’s financial situation.  The fact that widowhood isn’t creating more of an issue is a bit more shocking until one realizes that a healthy percentage of our retirees are still participating in a defined benefit system, and many of the benefit payouts come with survivorship rights.

With regard to future retirees, the lack of a monthly annuity in the form of a pension payout will mean that many of those workers aspiring to retire one day may just need to reconsider their potential retirement date. Asking untrained individuals to fund, manage, and disperse a retirement benefit is proving to be exceptionally difficult. As the article highlights, the average retirement balance for a typical 55-64-year-old with a 401(k) had a balance (401(k) and IRA) of only $134,000.  Also, remember that only about 50% of the working population have a company-sponsored retirement plan.

Will future retirees become more financially fragile?  I don’t see any way that they don’t, especially for lower-income individuals. It takes about 80% of one’s retirement income to meet the basic needs of housing, food, transportation, clothing, and healthcare. With the greater dependence on income generated from a 401(k), retirees will be subject to the negative impact of financial shocks and likely lower market returns in the foreseeable future.

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