Posts Tagged "financial security"

Using Home Equity Improves Retiree Health

Retirees spend $1,500 more per year, on average, for medical care after a diagnosis of a serious condition like lung disease or diabetes.

Often, the solution for individuals who can’t afford such big bills is to scrimp on care or avoid the doctor altogether. But older homeowners can get access to extra cash if they withdraw some of the home equity they’ve built up over the years.

While the money clearly provides financial relief for retirees, a new study out of Ohio State University finds that it is also good for their health. Every $10,000 that Medicare beneficiaries extracted from their homes greatly improved their success in controlling a chronic or serious disease.

Among the retirees who had hypertension or heart disease, for example, one standard used to determine whether the condition was under control was whether blood pressure levels stayed below 140/90, which the medical profession deems an acceptable level. The people who tapped their home equity were more likely to stay below these levels than those who did not.

This is one of several studies in recent years to tie financial security to home equity, a resource many retirees are reluctant to tap. A study in 2020 found that older homeowners were less likely to skip medications due to cost after they had extracted equity through a refinancing, home equity loan, or reverse mortgage.

But this new research is the first attempt to connect the strategy to retirees’ actual health. The analysis followed the health of more than 4,000 homeowners for up to 15 years after they were diagnosed with one of four conditions – lung disease, diabetes, heart conditions, or cancer. …Learn More

Retirees with Pensions Slower to Spend 401k

Retirees have long been reluctant to spend the money they’ve accumulated in their 401(k) savings plans. But it also used to be common for retirees to have a traditional pension to cover their regular expenses.

By the time the baby boomers came along, pensions were available to a dwindling minority of workers, and it isn’t entirely clear how much they’ll tap into their 401(k)s.

A new study quantifies the impact of this transformation in the U.S. retirement system, where traditional pensions are now found almost exclusively in the public sector. The conclusion, by the Center for Retirement Research, is that retired boomer households lacking a pension seem more likely to rapidly deplete the 401(k) savings they rely on, “leaving them with more risk that they will outlive their savings.”

Consider a simple example of the difference a pension makes. In the past, typical households that started retirement with a pension and $200,000 in 401(k)s and other financial assets had about $28,000 more at age 70 than their counterparts with $200,000 in assets but no pension. After age 75, the difference between the haves and have-nots widened to about $86,000.

For this analysis, the researchers used data on the retirement finances provided in a survey of older Americans, specifically the heads of households born between 1924 and 1953, which includes some of the earliest boomers.

The researchers also found that the pace at which these retirees spent their savings hinged on the percentage of wealth they held in the form of annuities, whether a pension, Social Security, or an insurance company annuity. The retirees who got more of their income from annuities depleted their savings more slowly.

Based on prior generations’ behavior, the researchers roughly estimated that boomers – given their lower pension coverage – are in danger of using up their financial assets at around age 85. This would leave them with little room in their budgets for a long life, a large unexpected medical bill, or an inheritance for their children.

Boomers probably shouldn’t assume then that their parents’ retirement experiences are a reliable indication of how they will fare.

To read this study, authored by Robert Siliciano and Gal Wettstein, see “Can the Drawdown Patterns of Earlier Cohorts Help Predict Boomers’ Behavior?”Learn More

Readers’ Favorite Retirement Blogs in 2021

For the baby boomers who are looking down the road to retirement, generalities will no longer suffice. They are diving into the nitty gritty.

Their keen interest in retirement issues, based on reader traffic last year, range from why the adjustments to Social Security’s monthly benefits are outdated to how it’s still possible for boomers, even at this late hour, to rescue their retirement.

First, and most important, there is hope for the unprepared. In “No-benefit Jobs Better than Retiring Early,” readers who want to retire but can’t afford it learned that they can dramatically improve their finances by finding a new job – ideally a less stressful or physically demanding one. Even if the job doesn’t have employee benefits, working longer will increase their Social Security benefits and allow them to save a little more.

The most popular article tackled a complex issue: “Social Security: Time for an Update?” The article explained the program’s actuarial adjustments, which are based on the age someone signs up for their benefits and factors into how much they’ll get. The adjustments, set decades ago, are no longer accurate, due to both increasing life spans that affect how much retirees receive from the program over their lifetimes and persistently low interest rates.

If these factors were taken into account, the researchers estimate that the average person who starts Social Security at age 62 would get more in their monthly checks, and the average person who holds out until 70 would get less.

However, not everyone is average. High-income workers tend to live longer and retire – and claim Social Security – later, while low-income workers have shorter lifespans and disproportionately start Social Security at 62.  The researchers conclude that the inequities “are not a problem that can be solved by tinkering with the actuarial adjustment.” A true fix would “would require a reassessment of the benefit structure.”

A major issue facing boomers in their late 50s and early 60s is that households with 401(k)s typically have saved only about $144,000 for retirement in their 401(k)s and IRAs. The reasons for insufficient savings – explained in “Here’s Why People Don’t Save Enough” – boil down to things that are largely beyond their control, including disruptions in their employment, a lack of access to employer retirement plans, lower earnings than they’d hoped for, bad investments, unanticipated premature retirements, and health problems.

However, workers can do something to gauge how they’re doing: make sure they know how much they’ll get from Social Security. …Learn More

Video: Boomers in RVs Seek Job, Security

Sales and rentals of recreational vehicles have skyrocketed during the pandemic as people working remotely use their newfound freedom to move their workplaces to the great outdoors.

Outdoorsy – the Airbnb of recreational vehicles (RVs) – reports that 40 percent of its new rental customers are under age 40. But long before younger adults hit the road, thousands of baby boomers were buying RVs to roam the country in search of work.

Rather than seeking psychological relief from COVID, as younger workers are doing, the boomers – some retired and some unemployed – are looking for financial security.

In this excellent PBS NewsHour segment, Paul Solman talked to boomers who park their RVs at campsites near whatever seasonal jobs they can find at places like Amazon and JCPenney warehouses, sugar beet farms, and theme parks and national parks.

During the summer tourist season, Judy Arnold has been working at Yellowstone National Park in Wyoming. But with so many businesses shut down by the pandemic, she worries about where her next job will come from. “I definitely need an income,” she told the NewHour.

George Stoutenburgh gave two reasons for his wanderlust. …Learn More

Lost Wealth Today vs the Great Recession

For older workers starting to think about retiring, the economic maelstrom the coronavirus set in motion is a reminder of that sinking feeling they experienced just over a decade ago.

In 2008, the stock market plunged nearly 40 percent, accelerating the steep decline that was underway in U.S. house prices. The unfolding 2020 recession is playing out differently. But both downturns have one thing in common: Social Security as a stabilizing influence on older workers’ retirement finances.

Baby Boomers lost wealthA 2011 study of the change in baby boomers’ finances during the Great Recession found that total wealth dipped by 2.8 percent, on average, between 2006 and 2010 for households between ages 51 and 56.

The 2.8 percent decline in wealth at the time was a significant setback for baby boomers. In more normal times, earlier generations had increased their wealth by 3 percent to 8 percent at comparable ages.

Nevertheless, things could have been so much worse for baby boomers were it not for the substantial wealth they had built up over several decades in their future Social Security benefits – an amount that is unaffected by the collapse of financial and housing markets. The average value of these future Social Security benefits was 30 percent of boomers’ wealth.

Wealth in the study also included home equity and retirement plan accounts.

This time around, it’s too early to determine the severity of the downturn’s effects on older workers. Unlike the previous recession, though, this one has had little impact on house prices so far, and the stock market, after sinking in March, has regained about half of its losses thanks to aggressive action by the Federal Reserve.

The major worry is unemployment. The jobless rate approached 15 percent in March – well above the 2009 peak of 10 percent – and economists expect it to keep rising.

But, in any recession, Social Security is a stabilizing force. Today, it represents a large share of older workers’ wealth just as it did a decade ago. And lower- and middle-income workers’ benefits are a much larger share of wealth, because they are far less likely to have substantial assets in 401(k)s. …Learn More

Art saying Now what?

Boomers Facing Tough Financial Decisions

For baby boomers who thought they were on the path to retirement, the road is shifting beneath their feet.

Danielle Harrison, a financial planner in Columbia, Missouri, sees a raft of problems stemming from the COVID-19-induced economic slowdown.

Many older workers getting close to retirement age are taking big hits to nest eggs that were already too small. Some boomers who lacked pensions and were behind on saving tried in recent years to make up for lost time with a riskier portfolio in the rising stock market – now they’re experiencing the downside of that risk. Others are scrambling to pay expenses or maintain debt payments as their income drops, altering their financial security now and changing their calculations for the future.

“It’s really going to hurt people,” said Harris, who believes that some baby boomers who had planned to retire in the near-term may be rethinking those plans.

And she’s talking about the boomers who still have jobs. The layoffs have already begun and will continue. Economists estimate GDP will contract in the second quarter at an unprecedented 10 percent to 24 percent annual rate.

Evan Beach, a financial planner in Alexandria, Virginia, predicted that “People are going to get fired, and the people who get fired are not the 25-year-olds making $60,000. They’re going to be the 50- and 60-year-olds making $120,000.”

The economic stimulus package Congress passed last week could help, because it was designed to mitigate some job losses by extending loans to businesses that preserve their payrolls. It will do nothing to repair investment portfolios, however.

Beach and other financial advisers worry that panic decisions in this tumultuous time will only make things worse for boomers who, now more than ever, need to preserve their retirement resources.

Just as they did in the years after the 2008 financial market crash, some unemployed boomers will pound the pavement for a job and will scrape by – through odd jobs, short-term contracts, and unemployment benefits – rather than be forced into a premature retirement.

But Beach anticipates that many of them may have no other option than to claim their Social Security – the program’s earliest claiming age is 62. The problem with starting Social Security now is that it would permanently lock in a smaller monthly check. This goes against a central tenet of retirement planning, which is that many people would be better off delaying the date they sign up to increase a retirement benefit they will need for the rest of their lives.

Beach conceded, however, that claiming the smaller benefit now is not irrational for a couple with one laid-off spouse, only $2,000 in income, and $3,000 in expenses. If the laid-off spouse can start getting $1,000 from Social Security, he said, “that’s not irrational. That’s desperate.” …Learn More

401k Balances are Far Below Potential

If a 60-year-old baby boomer started saving consistently at the beginning of his career back in the 1980s, he would have some $364,000 in his 401(k)s and IRAs today.

Bar graph showing a 60-year-old worker's 401(k): potential vs. reality

How much does he actually have? One-fourth of that, according to a new study from the Center for Retirement Research at Boston College (CRR).

One obvious explanation for the enormous gap is that the 401(k) system was in its infancy in the 1980s, and it took time for employers to widely adopt the plans and for young adults to get into the habit of saving for retirement.

Another likely reason is the large share of workers who do not have any type of employer-sponsored retirement plan.  This coverage gap, which predates the introduction of 401(k)s, persists today and leaves about half of private-sector workers without a plan at any given point in time.

And this gap isn’t just a problem for baby boomers. A majority of young workers are not saving in a retirement plan, despite their advantage of having entered the labor force after the 401(k) system was more mature. …Learn More