PLANSPONSOR - April/May 2018 - 10

Upfront
Current
Retirees
Can Absorb
Financial
Shocks
THE latest analysis from the Center for
Retirement Research (CRR) at Boston
College asks " Will the financial fragility
of retirees increase? " -a critical question,
and one that is hard to answer.
In their attempt to do just that,
researchers first examined the expenditures
a typical elderly household devotes to
basic needs. Next they reviewed evidence
on how today's elderly absorb two major
shocks: a spike in medical expenses
and a decline in income when widowed.
Finally, they considered the dependence of
today's and tomorrow's elderly on personal
financial assets-particularly 401(k) and
other retirement accounts-mapping
TALKING POINT
Age and Assets
The age group with the most investable assets is 55 - 64 years, with $16 trillion, while
the group with the most households is 34 years and under, with 25.5 million.
= U.S. households (millions)
= U.S. household investable assets ($trillions)
25.5
21.5
23.1
24.2
$16.0
$8.2
$1.2
<35 years old
$3.1
35 - 44 years old
45 - 54 years old
Source: Hearts & Wallets, Survey of Consumer Finances
55 - 64 years old
65 - 74 years old
>75 years old
17.8
$11.1
14.1
$8.7
anticipated dependence against the sufficiency
of retirees' assets.
At a high level, researchers conclude,
" most current retirees can absorb a shock. "
However, they warn in no uncertain terms
that future retirees will be more likely to
experience financial fragility unless they
dramatically reduce their fixed expenses or
draw increased income from their assets.
The CRR analysis points to studies that
show that nearly 80% of the spending of a
typical elderly household is used to secure
five " basic " needs: housing, health care,
food, clothing and transportation. These
needs account for an even greater share of
the expenditures of lower-income households,
single individuals, and households
that rent or have an outstanding mortgage.
" If necessary, households could cut
back on non-basic items, which include
cable TV or a cell phone, " researchers
advise. " Spending on basic needs could
also be trimmed. These figures nevertheless
suggest that typical retirees cannot
cut expenditures by more than about 20%
without experiencing hardship. "
Today, hardship-i.e., the need to cut
back on food or medication due to a lack
of funds-is experienced by about only
10% of retirees due to medical expenditure
shock and widowhood, the data shows.
Future Retirees
As to the difficulties future retirees may
face, " First, to maintain their standard
of living, they will increasingly rely on
income drawn from financial assets accumulated
over their working careers. This
transition in the form of retirement income
is largely due to the shift from traditional
employer pensions to 401(k)s. Second, not
only is the form of income changing, but
its overall level-relative to pre-retirement
earnings-is declining. Social Security
will replace a smaller amount of earnings
at any given claiming age. And the shift
to 401(k)s suggests that many households
could also receive somewhat lower replacement
rates from employer plans. "
The CRR's conclusion is that, in this
changing environment, retirees will face
challenges in drawing from their nest
egg an income that is " both sufficient and
dependable " and, therefore, could end up
experiencing greater financial fragility.
-John Manganaro
10 PLANSPONSOR.com April-May 2018
http://www.PLANSPONSOR.com
PLANSPONSOR - April/May 2018

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