Will the Financial Fragility of Retirees Increase?

The elderly have long been seen as financially fragile, meaning that they may be ill-equipped to absorb a financial shock. The key reason is that, once retired, they have little ability to increase their income compared to working households. Going forward, retirees will get less of their income from Social Security and traditional pensions and more from financial savings in 401(k)s. Having these savings gives them greater flexibility to respond to shocks. But tapping the nest egg comes at the cost of having less to cover ongoing expenses. The increased dependence on financial assets also introduces new sources of risk – that households accumulate too little and draw out too little to cushion shocks and that their finances are increasingly exposed to market downturns. This brief reviews studies by the Social Security Administration’s Retirement Research Consortium and others that address how the growing dependence on household savings affects the financial fragility of the elderly.

The discussion proceeds as follows. The first section examines the share of expenditures that a typical elderly household devotes to basic needs. The second section reviews evidence on the ability of today’s elderly to absorb two major shocks: a spike in medical expenses and a decline in income when widowed.

Center for Retirement Research @ Boston College