Financial transactions are a basic part of life. They include shopping, paying bills, paying taxes, making decisions about expenditures and investments and more. After retirement, as before, successful financial management involves balancing income, outgo and savings.
By age 65, most people are set in their financial ways – spender or saver, risk-taker or risk-averse. What changes is where income comes from and what it’s spent on.
Changes in Sources of Income
Not long ago, most seniors received pensions as well as Social Security. Both guaranteed a monthly stream of income for life. Social Security was intended to supplement employer-provided pensions. Today, fewer and fewer retirees have pensions and for a growing number, Social Security is their only income.
With an average monthly Social Security check below $1,300 per month, many seniors are living on less than $15,000 a year. Indeed, a recent Kaiser Foundation study found that “nationally, nearly half of all seniors (48%) live with incomes below 200 percent of the poverty threshold.”
People without families are disproportionately likely to fall into this group. According to the Social Security Administration, in 2012, almost half of unmarried retirees relied on Social Security for over 90% of their income, compared to less than a quarter of married couples.
Their data also showed that in 2012, 51% of the workforce had no private pensions and 34% had no retirement savings at all.
For many people with better-paying jobs, pensions were replaced with employer-subsidized, tax-sheltered investment portfolios or annuities, creating a population whose retirement nest egg is stored in a variety of brokerage accounts. These accounts require active management and are subject to the vagaries of the market. As we all learned in 2007, a badly timed bear year can be devastating.
The prime beneficiary of the demise of pensions has been the financial sector, ever scrambling to develop new products for us. Deferred Variable Annuities, funds with retirement-year based goals, REITs, ETFs, and on and on – an acronym soup as thick as Medicare’s.
Hopefully, we’ve learned to exercise caution and do our due diligence before investing in any of these. But invest we must. As we’re frequently reminded, risk-free savings are losers, since the interest rate on an old-fashioned savings account is less than one percent.
Seniors also draw income from employment, rental properties, and the sale of assets, especially their homes. All of these require active involvement and are subject to forces beyond our control. Seniors with family can usually rely on adult children to take over selling assets and managing rentals. Those without family will do it themselves or pay others to do it for them.
No matter how you look at it, all but the richest have reason to feel insecure. If your post-retirement income comes primarily from Social Security and pensions, and your primary assets of value are your house and your car, the longer you live, the poorer you’ll be. Proposed changes to the way Social Security calculates cost-of-living adjustments will only make you poorer. (These changes are currently on hold. For more information: Impact on Social Security; CPI Explained.)
If a significant part of your retirement income comes from investment and savings accounts, your annual income will be less predictable from year to year and a badly timed bear year can permanently affect you.
There are regular media warnings about baby boomers outliving their savings (e.g. Retiree Nest Eggs Look More Fragile) and hand-wringing about the strain this will put on our health care system and our economy as a whole. Not surprisingly, many people are wondering if they’ll have enough money, and what will happen if they don’t.
Personal Disclosure: I’m among those whose retirement nest egg is largely in brokerage accounts. For decades, I paid for management assistance. The fee service provided a personal “portfolio consultant” along with a dedicated advisor. Both were available at any time to answer my questions and explain things.
But after retiring, rising fees prompted me to rethink my investment strategy and I’ve become a “Boglehead,” or proponent of John C. Bogle’s investment philosophy.
Bogle, who founded Vanguard and guided its development, makes the case that over time, low-cost index funds will do better than expensive actively managed funds. After watching my “portfolio consultant” make minimal rebalancing changes to a long list of funds every quarter, I simplified my accounts as per Bogle and stopped paying management fees. So far, it’s worked fine.
Finance advice for seniors abounds on the web. AARP has a whole sub-web devoted to it – AARP Money. Googling any finance-related topic will overwhelm you with information sources. If it’s too much to deal with, history suggests that you won’t go wrong following Vanguard’s approach.
The lack of low-cost financial advice and management services is an opportunity for the entrepreneurial. I’ve recently seen several references to online startups offering low-cost financial guidance, e.g. Financial Advisor Start-Ups Offering Low-Cost Guidance Online. Even the major brokerage firms are starting to offer fee-free advice.
Changes in Spending
How will our spending change as we age? At first, as “active adults,” we can reinvest monthly surpluses or use them for travel, education and carefree retirement living. But as we grow older, healthcare costs are likely to rise, including co-pays, prescription drugs, dental care, hearing aids, orthotics, prosthetics, mobility devices, other assistive devices, home retrofits, transportation to medical appointments and more.
We’re also likely to need more services, both medical and practical: housekeeping and home maintenance workers, personal care aides, health aides, care managers. Although the rate of overall inflation is currently low (further depressing Social Security cost-of-living adjustments), inflation is high in most products and services needed by seniors. Articles appear frequently warning of rising costs and impending shortages in drugs, devices, and services. (E.g., Cancer drug shortages mean higher costs and greater risk for patients; A Future Doctor Shortage; A Shortage of Caregivers.)
What’s different for those without family? As people age, spouses and adult children provide assistance ranging from household upkeep to transportation and shopping. As people continue to age, family members may provide custodial care and even skilled medical care. When individuals with family experience health crises, family members typically manage their transitions to assisted living or nursing homes even if they don’t serve as actual caregivers. (Partial List of Services Provided by Family Caregivers)
Estimates of the dollar value of unpaid services provided by family caregivers place it well above $5000 annually (and growing). People without family who want similar services (and we will) must include their cost in projections of future expenditures.