Avoiding Financial Shocks

Art by Tim Peacock

The latest analysis from the Center for Retirement Research (CRR) at Boston College asks the critically important but difficult to answer question, “Will the financial fragility of retirees increase?”

To find an answer, researchers first examined the share of expenditures that a typical elderly household devotes to basic needs. Next, they reviewed evidence on the ability of today’s elderly to absorb two major shocks—namely, a spike in medical expenses and a decline in income when widowed. Finally, researchers considered the dependence of today’s and tomorrow’s elderly on personal financial assets—particularly 401(k)s and other retirement accounts—mapping anticipated dependence against the sufficiency of assets.

Researchers conclude that “most current retirees can absorb a shock.” However, they warn in no uncertain terms that future retirees are 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 a number of studies to demonstrate 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.

“Households could cut back on entertainment, gifts and other non-basic items, including cable TV or a cell phone,” researchers say. “Spending on basic needs could also be trimmed. These figures suggest that typical retirees cannot cut expenditures by more than about 20%.”