February 23, 2012
For Many Elderly, Little Left as Life Ends
About half of the elderly living alone and one-third of elderly couples have less than $10,000 left in their savings and investment accounts just before they leave this world.
These grim statistics may be a more accurate gauge of retirement survival than the balances Americans have accumulated as they enter retirement, a pursuit that pre-retirees and the financial-services industry tend to focus on.
To determine where retirees wind up financially, economists James Poterba at the Massachusetts Institute of Technology, Steven Venti at Dartmouth College, and David Wise at Harvard University crunched a mass of data. Tracking a nationally representative sample of middle-aged and older Americans, they tabulated the financial assets held by elderly couples and the elderly living alone as they approached retirement, retired and aged, and when they were last observed in the sample.
The following is a small slice of what the researchers found in the last years before the elderly died:
- Elderly living alone:
57.0 percent had less than $10,000 in financial assets;
57.1 percent had no home equity.
- Two-person households:
31.7 percent had less than $10,000 in financial assets;
20.4 percent had no home equity.
“What we take away from this is that a significant number of households have a very small cushion if they encounter any kind of financial need,” Poterba said in a telephone interview last week, referring to a new working paper, “Were They Prepared for Retirement? Financial Status at Advanced Ages in the HRS and AHEAD Cohorts.”
Financial assets included in the study (detailed in the pie charts below) were held in IRAs, Keoghs, 401(k) plans, investments, and bank accounts. Social Security and income from traditional defined-benefit pensions were excluded here, though the paper tabulates that too.
These findings “raise fundamental questions about the health of the US retirement savings system,” said Harvard economist David Laibson, in a published comment on their paper. Laibson isn’t optimistic about the financial prospects for retirement among younger Americans either.
It doesn’t have to be all gloom. It’s possible some people have been extremely accurate in estimating their financial needs in retirement – virtually down to the last penny. Or perhaps some may have given almost everything away in time to avoid estate taxes. Indeed, the well-off also shine through in these data, which show that nearly half of two-person households have more than $50,000 left – this can mean millions of dollars for a small minority of them.
But a frightening share of the elderly seems to run out of money, and plausible explanations run the gamut. They may have started with few financial assets as they entered retirement, a well-documented problem. Inadequate retirement income from employer pensions or Social Security is another reason to deplete assets rapidly. And a mere $10,000 in the bank at the end of one’s life provides no clues as to how many corners were cut during years, even decades, of retirement.
Daily living expenses do tend to decline as one ages: income taxes are lower for most retired people, as are commuting and work expenses like pricey business suits. “A lot of the discussion of changes in expenses has focused on what happened in the early years,” Poterba said.
But he noted that late-life expenses can be steep, ranging from installing a wheelchair-accessible walkway at home to paying full freight for a nursing home. By one estimate, $250,000 in retirement savings is the minimum required if nursing-home costs are included in retirement expenses.
The reasons for the low balances are beyond the scope of the new research. That, Poterba said, “needs to be investigated.”