Retirement is supposed to be a time of pleasure and relaxation for senior citizens so they can fully enjoy this new phase of life. Sadly, a worry-free retirement is no longer a reality for many. Despite working hard and saving their whole lives, many seniors are finding themselves less well off than they anticipated and concerned about their long-term financial resilience. This is due to several major challenges that previous generations did not face. Understanding the challenges is the first step in determining how to best address them and plan for the future.
The Financial Reality of the Great Recession
In the two decades leading up to the Great Recession, both seniors and younger generations saw significant wealth gains, which meant that seniors in the 1980s and 1990s were approaching retirement with a higher median wealth than the generations that came before them. That all changed in 2007 when the Great Recession wiped about 28 percent off the net worth of many early Baby Boomers. Many of those born later, between 1946 and 1955, lost about 25 percent of their net worth during the downturn, according to research by the Pew Charitable Trusts.
The Great Recession officially ended in June 2009 but the recovery period won't set any records for speed. It took far longer than people hoped for the stock market to recover from its record low. This was not necessarily a problem for long-term investors who had taken the opportunity to buy attractively priced stocks and wait patiently for the upswing. But for seniors, it's a reminder of the volatility of the stock market and its ability to slash their anticipated retirement income, almost overnight.
Faced with the shock of the recession and years of mediocre, post-recession growth, many seniors switched some of their retirement nest egg to low-risk, fixed return investments like certificates of deposit. While certainly safe, such a move may not have been prudent – and that's due to ultra-low interest rates hampering investment returns.
Historically Low-Interest Rates
The Federal Reserve has raised short-term interest rates eight times since 2015 in an attempt to unwind years of historic lows. As a result, rates are currently benchmarked to a range between 2 and 2.5 percent. This is well above the record low of 0.25 percent in December 2008, but still a considerable way below the all-time high of 20 percent in March 1980.
While low-interest rates tend to boost home mortgage loan applications and credit card spending, they effectively stymie the ability to earn significant returns from fixed-income investments such as savings accounts, bonds and certificates of deposit. If the majority of a senior's retirement savings is invested in fixed-term instruments, there's a risk that inflation will outpace the interest rate so the money will be losing value in real terms.
Moving to a Fixed Income
Seniors living on a pension or retirement plans – and sometimes only Social Security – are suddenly restricted to a fixed income at retirement. Working longer should be an option, be often it is not. The labor market is recognized as being highly unfavorable to older job seekers, and factors such as caring responsibilities and ill-health often get in the way of a senior's ability to work. Generally, it's much harder for seniors than it is for younger people to pick up a part-time job or find other ways to supplement their incomes.
What this means is that when an unexpected expense arises, such as a large medical bill, some retirees have to eat into the principal of their savings or use credit cards or other money-loaning schemes to handle the financial shock. While using credit can provide a quick-fix solution to seniors who are struggling with finances, it invariably comes with fees and interest charges that increase their monthly living expenses.
Rising Healthcare Costs
Every day, around 10,000 seniors reach the age of 65 and join the 60 million or so Americans enrolled in Medicare, the federal health insurance program for seniors and people with disabilities. It's a benefit they've been funding for years as working taxpayers, and it has the advantage of covering a wide range of medical services without excluding pre-existing conditions.
The downside is that the coverage costs. Seniors with a tax history of 10 years can enroll in Medicare Part A for zero cost, while others pay up to $422 per month in 2018. All enrollees pay a premium for Part B coverage and the ballpark here is $134 a month. Part D, the prescription drug plan, adds an extra monthly surcharge depending on the plan and the drugs that are used.
Aside from the monthly premium, out-of-pocket expenses can be substantial. A senior enduring a hospital stay, for example, would have to pay a Medicare Part B deductible of $1,340 before coverage kicked in. There's a copayment of, generally, 20 percent of the Medicare-approved amount for the medical provider's services. Researchers estimate that one in four seniors skip seeing their doctors when sick or go without a recommended treatment because of high out-of-pocket Medicare costs.
Retirement Problems of Finance, Home Loans and Never-Ending Debt Obligations
Traditionally, seniors could reasonably expect to own their homes outright before retirement. Today, around 44 percent of seniors between the ages 60 and 70 still have a mortgage when they retire. Furthermore, as many as 17 percent expect to live out all of their golden years with a mortgage debt around their necks, believing they will never pay it off.
The relatively high incidence of mortgage debt among seniors has the potential to strain retirement finances. Given that most people's incomes go down in retirement, monthly mortgage payments could stretch retirees' limited incomes to the breaking point unless they trade down to a less-expensive home.
For seniors who own their homes outright, reverse mortgages pose a special type of problem. These loans are designed to allow a free-and-clear homeowner to tap into his home's equity and delay repayments until he sells the house. Many seniors turn to these types of mortgages as a way to pay for living expenses and medical bills. However, even though there is no mortgage payment, borrowers are still obligated to pay property taxes and homeowner's insurance with reverse mortgage loans. Seniors who fall behind on these payments could suddenly find themselves facing foreclosure and losing their homes.
Social Security Problems
According to the Social Security Administration's retirement income statistics, almost half of married couples count on Social Security to provide at least 50 percent of their retirement income in 2018, while 21 percent of married couples and 44 percent of unmarried seniors rely on Social Security for at least 90 percent of their income in retirement. These are big numbers, and a hot topic for politicians and seniors alike.
Some policymakers have suggested that the current rate of taxation for working people is not sufficient to keep the Social Security program solvent beyond the mid-2030s. Unless the funding issue is addressed, it's possible that benefit cuts will become necessary, further adding to the retirement challenges facing seniors.
- Trading Economics: United States Fed Funds Rate
- The Pew Charitable Trusts: Retirement Security Across Generations
- CNN Business: The US Economy Just Hit a Milestone
- Olivia K. Smith Attorney: Financial Challenges Facing Seniors…And How to Fight Back
- Debt.org: Medicare Cost and Medical Debt
- Medicare: Medicare Costs at a Glance
- Greenville News: People on Medicare Struggle More with Medical Bills than Seniors in Other Countries
- American Financing: Does Your Mortgage Retire With You?
- Social Security Administration: 2018 Fact Sheet
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.