With rising longevity, three late-life risks—medical expenses, cognitive decline and widowhood—could threaten the financial health of older Americans.
Even more concerning, a growing number of 401k participants may fall victim to these dangers in coming years, according to the Center for Retirement Research (CRR).
CRR examined research by the Social Security Administration’s Retirement Research Consortium and others to get a grasp on the extent to which current retirees are grappling with these issues, and the degree to which future generations may be impacted.
“Understanding the financial risks faced by Americans ages 75 and over—a population that is projected to more than double by 2040—is important for two reasons,” CRR wrote in its latest brief.
“The first reason is that physical and mental health problems become much more pronounced at these ages, meaning that people run the risk of draining their savings through high out-of-pocket medical costs or financial mistakes.
“The second reason is that people will increasingly face these challenges with 401ks, which provide lump sum assets that may be hard to manage with age, especially since initial balances tend to be modest.”
Medical Expenses in Retirement
Data show elderly households on average currently spend around $100,000 on out-of-pocket healthcare costs and long-term care, with the top 5 percent of spenders incurring almost $300,000 in expenses.
“Although Medicaid mitigates the risks of these very high amounts for the poor, for those with 401k wealth, who tend to be higher income, these costs can end up eating into their wealth,” CRR noted.
In addition, experts anticipate healthcare costs will continue to rise at a faster rate than retirees’ income, potentially worsening this burden in the future.
Managing Money in Retirement
The shift away from pensions toward 401ks and similar retirement plans has created a host of hiccups—some of which are entirely manageable, while others are less so.
CRR pointed out that “the incidence of cognitive decline also begins rising after age 75, with the rate of dementia growing quickly from 7 percent for people in their early 70s to roughly a quarter for those in their early 80s, raising the risk of financial mistakes or fraud.”
For the lucky ones, a non-impaired spouse or child might help a cognitively impaired senior manage their finances. However, those without help may experience financial hardships due to mismanagement or fall prey to a financial scheme.
Unfortunately, the lump-sum payout structure of many 401k plans can be more burdensome to manage and more vulnerable to fraud than formerly popular pension payouts. And to make matters worse, declining birth rates mean “tomorrow’s retirees will have fewer children to sup- port them than their parents did, and children are a primary source of financial management assistance,” according to CRR.
Widowhood in Retirement
Rates of poverty resulting from widowhood have decreased in recent years, largely because of women’s growing presence in the workforce and increasing levels of education. Going forward, however, CRR is concerned about the degree to which widows can replace their pre-retirement income and maintain their standard of living.
In the future, female 401k savers who face widowhood in retirement may encounter more financial hardship than today’s retirees due to an increasing reliance on individual wealth.
“Munnell and Eschtruth (2018) provide one counterintuitive reason for this increased reliance—women are working more and earning more relative to their husbands. Because of the way Social Security widow benefits are designed—with a widow entitled to the larger of her own benefit or her husband’s—this change means that widows’ household income from Social Security drops more than it used to when a husband dies,” CRR concluded.
“So, while poverty may be less likely in the future for widows, a drop in their standard of living or the need to dig into their wealth might become more common.”