Tomorrow’s Retirees Face Shortfalls, But Reluctant to Explore HECMs

Many studies have explored the ways in which current seniors find themselves ill-prepared for their retirement years, but a new analysis from Boston College finds that the picture looks even bleaker for future generations.

The vast majority of households aged 65 and older reported not having to make financial cutbacks when faced with two key financial “shocks” — the loss of a spouse or a surge in medical expenses — according to research fellow Steven Sass of BC’s Center for Retirement Research.

“Research suggests that while some of today’s retirees are financially fragile, most appear able to absorb shocks without incurring hardship,” Sass wrote. 

Just 10% of elderly Americans who responded to the Health and Retirement Study (HRS) reported having to reduce spending on necessities to offset the loss of an income from a deceased spouse or to cover medical bills. Interestingly, older folks faced with health problems tend to spend more money on other household costs, such as transportation and food, than they did before the shock.

“Most households thus appear to have sufficient public and private insurance and/or savings to buffer medical expenditure shocks,” Sass wrote, adding that widows also tend to maintain about 75% of their earlier spending as a couple.

But those figures only cover current retirees, and Sass sounds the alarm about future generations. Younger baby boomers and members of Generation X will see significant drop-offs from the income levels of current retirees: At the highest income levels, Generation Xers have 21% less replacement income than their retired counterparts, with a drop of 9% for middle-income households. For younger “trailing boomers,” those figures are 18% and 8%, respectively.

Sass blames the lack of traditional pensions and declining Social Security benefits relative to overall earnings — and also notes that retirees are often reluctant to explore other options that could help them weather financial storms.

“Working longer, annuitizing wealth, and taking out a reverse mortgage would increase retirement income,” he concludes. “Downsizing is the most effective way to reduce fixed expenses and could also increase the household’s financial assets. While many individuals are already working somewhat longer, retirees rarely annuitize, downsize, or take out a reverse mortgage.”

Read the full brief at the Center for Retirement Research at Boston College.

Written by Alex Spanko

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