Are aging Americans rolling in money or struggling?

The answer is, both.

The wealth of aging Americans is a highly politicized issue because they are a critical voting demographic. There is research suggesting there’s no aging crisis, and counter research suggesting that Social Security is bankrupt and aging Americans are doomed unless there’s government intervention. I’ve tried to read as many conflicting news sources and data-sets as possible, and looked at key financial inputs/outputs to get a picture of the financial standing of Americans over 65.

1. The 50/50 rule applies

While the median net worth of individuals over 65 is around $260k, there’s a wide variance. 20% of seniors in America are wealthy. They have large nest eggs comprising diversified investments. They are time rich and money rich. The next 30% are comfortable and can maintain a high quality of life while spending down effectively. This demographic is vulnerable to unanticipated health events but not at risk at large.

The bottom 50% of the population is unable to meet life expenses and highly vulnerable in case of sharp health decline.

Further analysis of age cohorts within the 65+ group shows that the Silent Generation (now in their 80s – born between 1925-1942) has 1.3x the net wealth of the early Baby Boomers. In turn early Baby Boomers have more wealth than late Baby Boomers. This declining trend of wealth continues so as we think to the future, solutions for the middle and lower deciles will be more applicable.

2. Sources of income vary by wealth

Net wealth is a helpful big-picture assessment of individuals’ financial well-being. In addition, it’s also important to understand monthly income. This may come from an individual’s existing wealth (i.e. IRAs, 401k, rental properties etc.) or from sources that would not show up in their net wealth (e.g. Social Security, assistance from family members). As before, there are two distinct pictures – one for the wealthy quintile and one for everyone else. Individuals over 65 who are in the top quintile rely heavily on earnings (from jobs, savings accounts) and asset income. Individuals in the bottom quintile are highly dependent on social security.

Counter to popular belief, Americans that are working longer are more likely to belong to the top quintile instead of the bottom quintile. This also explains the difference in reliance on earnings for monthly income. A huge opportunity exists in mobilizing individuals to work longer and reduce their reliance on social security. This may lead to higher quality of life and less dependence on government support.

3. Homes represent wealth, but also a hefty financial burden

Most Americans over 65 own their homes and a majority have paid off their mortgages. This explains why many older Americans have low housing expenses (typically these are property taxes and home insurance).

For home owners who have not paid off their mortgage by the time they reach 65, home expenses are very high and represent the lion’s share of monthly cash outflow. The ~30% of older Americans who are renters tend to fare better but are also the lowest income group overall.

For the 55% of older Americans who either rent or have a mortgage, house expenses are a big burden on monthly income.

In addition, for individuals that own homes (with or without mortgage), home equity represents a large percentage of total wealth and this wealth cannot be used to pay for life expenses. While home equity loans and reverse mortgages are available, they are not favorable for home owners and difficult to setup, which explains low adoption rates.

4. Spending changes but doesn’t decrease

This is a common myth – people spend less money as they retire and age. Several research papers in the 1990s posit this. However new research (as of 2016) paints a more detailed picture.

Spending does change as individuals leave the work force and enter into a time-rich period of their lives. However it does not decrease in absolute terms. In many categories, it actually increases. This is directly related to income replacement rate after retirement to sustain a similar quality of life.

After retirement, there’s a noticeable decline in individuals spending on food (in-home and out of the home), transportation and clothing. Transportation and clothing expenses are directly tied to work-place activities like daily commute, business travel, and diversity in work attire. Decline in food expenses is a little less obvious, especially given that food consumption does not decline. The explanation is that retired individuals are time-rich and take pleasure in preparing food from scratch. Instead of purchasing pre-made meals or the hot food bar at the grocery store, they shift their spend towards buying fresh vegetables, meats and fruit and preparing meals at home.

In contrast to these declining categories, the following categories of spend increase relative to pre-retirement years:

• Entertainment (including gambling, hobbies, recreational activities and classes, watching movies and TV shows)
• Charitable donations and spend on community causes
• Utilities and housing services

It is also important to note that all retirement wealth quartiles experience these shifts in spend behavior, however the lowest quartile has the sharpest decline in food, transportation and clothing spend.

The only exception to this overall shift in spending is in households that retire involuntarily. Usually this is the result of a sudden change in health, or being laid off. In these households there are dramatic declines in spending across most categories.

5. The truth about the dreaded health care bill

Americans over 65 cite healthcare costs as their top concern about the future. This concern impacts their feelings of readiness for retirement, decisions about how long to stay in the work force, as well as how to spend down their savings.

Most senior citizens' healthcare is covered by Medicare (the federal program that provides healthcare coverage to aging Americans). If this is comprehensive, what are Americans worried about?

Three factors to consider:

1. Home care is not health care: Medicare only covers health care costs. Home care (i.e. assistance with eating, transferring out of bed, bathing, eating) is the result of declining health but does not classify as health care. Therefore it must be paid for out-of-pocket or via long term care insurance (which most individuals don’t have).
2. Gaps in Medicare coverage: Medicare coverage has gaps (many of which seem unpredictable to individuals using Medicare) and must be paid for with Medigap insurance or out-of-pocket.
3. Policy and politics: Healthcare policy is a heavily politicized topic in the U.S. and perceived as unreliable because it’s dependent on which party is in power.

Lower-wealth aging Americans tend to have higher medical expenses than their wealthy counterparts, and a larger portion of their medical expenses is covered by the government (through Medicare and Medicaid).

Medical spending is also concentrated, with the top 5% (by total expenditure) accounting for 35% of total medical spending. The average annual spend for an individual within this top 5% is $98,000, which is 7x the overall average of $14,000 per year.

Health care expenses also double between the age of 70, and the age of 90. The last 3 years of life account for around 15% of the total healthcare cost incurred on an individual after 65.

Opportunities

There’s been a lack of energy in designing products and services for aging Americans because of beliefs that they don’t have the disposable income or wealth to be a lucrative demographic. The numbers suggest otherwise. At the high end of the wealth spectrum, there are opportunities to create tailored experiences for entertainment, gaming, managing investments, life enrichment activities and experiences. In the middle of the spectrum, there are opportunities to make individuals’ wealth work for them (whether that is equity in their homes, or leveraging social security at the right time and compensating with employment). At the low end of the wealth spectrum there are opportunities to leverage communities to make up for gaps in wealth, perhaps trade in services rather than cash.

Other posts on aging

Aging America - At a glance

Aging workers of America

Aging in America - where is home?