American Retirement Crisis: The Problem
America is facing a serious retirement crisis: many Americans are not confident that they will be able to enjoy a comfortable retirement, and many retirees face longevity risk, or the danger of outliving their life savings. The 2008―2009 economic downturn drastically changed the financial landscape and caused profound shifts in the way that many Americans view their retirements. Despite being the largest, wealthiest, and most influential generation of Americans, baby boomers are facing one of the most serious retirement challenges in history. A combination of declining income, increased longevity, and high costs mean that an increasing number of Americans face the possibility of outliving their assets.
One economic study found that approximately 46 percent of Americans die with less than $10,000 in assets, many of them lacking even home equity and relying largely on Social Security benefits to meet their expenses. Most shockingly, many of the households surveyed in the study entered retirement in good financial health; factors such as unexpected health expenses, market losses, and increased lifestyle expenses combined to erode their financial security.
UNDERSTANDING THE PROBLEM
The Effects of the Financial Crisis
The economic downturn drastically changed the financial circumstances of many seniors. According to a study presented at the 2013 Financial Security Summit, Americans aged seventy-five and older lost one-third of their financial assets and one-sixth of their total net worth between 2007 and 2010. While many household balance sheets have recovered in the years since, retirees and pre-retirees have much less time to make up lost ground when markets decline. Living so close to the financial edge can have devastating consequences; seniors who find themselves in this position might not be able to withstand financial shocks, such as expensive medical treatments not covered by Medicare or Medicaid, or other unexpected events, such as the need to replace a car or a household appliance.
Many Retirees Underestimate Future Living Expenses
An accurate estimate of your post-retirement living expenses is critical to credibly projecting how large your nest egg needs to be to ensure a comfortable retirement. Unfortunately, accurately estimating these expenses can be challenging, and retirees who depend too much on optimistic estimates of their future expenses might find themselves facing shortfalls. While it’s possible to reduce retirement expenses by adapting your lifestyle to your circumstances, it’s always best when those changes come by choice, not by lack of options.
Health-care costs are one of the major contributors to increased living expenses after retirement. The rapid increase in medical costs over recent years has caused considerable angst for retirees since, as people age, their healthcare expenses tend to rise.
According to data collected by the Kaiser Family Foundation, inflation increased by approximately 3% each year during the period of 1999 to 2015, cumulatively eroding purchasing power. During the same period, workers’ earnings increased by 56%. However, healthcare insurance premiums increased by a staggering 203%, far outstripping wage increases over time. If healthcare inflation continues to grow at similar rates in the future, retirees might struggle to cover rising medical costs.
LIVING LONGER IN RETIREMENT
Life expectancies for both men and women have steadily increased over time. In 1950, a sixty-five-year-old man lived to an average age of 77.8, while a woman lived to an average age of eighty. In 2016, a sixty-five-year-old man's average life expectancy has increased to 84.3, while a woman’s has reached 86.6. In fact, actuarial tables show that there’s a fifty-fifty chance an average American will live beyond his or her life expectancy.
Many retirement plans were not designed with the possibility of living more than two decades in retirement in mind, and a retirement plan structured that way might not provide enough income to last the investor’s lifetime. Couples also need to consider joint life expectancies and the probability that one spouse might long outlive the other. Longer lifespans may also increase the effect that health-care costs have on living expenses, and many retirees face the issue of paying for assisted living facilities or retirement communities when independent living is no longer possible.
- “Were They Prepared for Retirement?” NBER
- “A crisis for the very old: They're outliving their assets.” LA Times
- “Employer Health Benefit Survey 2015.” Kaiser Family Foundation and HRET
- “Table 22. Life expectancy at age 65.” CDC
- “Social Security Calculators: Life Expectancy.” SSA