Almost one-third of retired Canadians are worried that they’ll run out of money over the long term, even though they’re generally satisfied with the current quality of retirement, according to a recent study from Canadian Imperial Bank of Commerce.
This apprehension isn’t baseless, suggests a recent study from the Cambridge, Mass.-based National Bureau of Economic Research (NBER) entitled Were They Prepared for Retirement?
Although much attention has been paid to how much wealth people should aim to accumulate prior to retirement, the NBER study focuses on the evolution of that wealth during retirement, right up until death.
This study paints a gloomy picture, suggesting that legions of seniors have almost no independent ability to withstand financial shocks, such as uninsured medical expenses.
According to the NBER study’s lead researcher James Poterba, an economist at the Massachusetts Institute of Technology, 46% of American seniors rely almost totally on Social Security payments as their only formal means of support and die with less than $10,000 in financial assets.
The NBER study centred on people who were aged 70 and older in 1993, tracking these retirees and their financial situations every two years for as long as they remained living through to 2008.
The study relied upon data collected in the ongoing Health and Retirement Study, sponsored by the National Institutes of Health.
The researchers identified three main “pathways” running between the early years of retirement and death: those consisting of one person who remained single until death; married individuals who outlive their spouses and die single; and married individuals who die before their spouses.
The three pathways tend to produce very different financial outcomes for the elderly, although one thing is clear: on the whole, married couples were far better off than single people.
Unmarried older individuals had median wealth of about US$165,000 roughly a year before they died – a figure that includes current and future Social Security income, job-related pension benefits, home equity and financial assets.
On the other hand, the median wealth for continuously married seniors, roughly a year before they died, was more than US$600,000.
Among those who were single, 52% had annual income of less than $20,000 and less than $10,000 in assets. In contrast, just 36% of single people who started out in two-person households at retirement dropped below those levels; only 26% of people in two-person households fell into that category.
A large portion of retirees rely almost entirely on government benefits for support in retirement, Poterba observes, balancing precariously on one leg of the oft-touted three-legged stool.
Yet, based on a replacement rate comparison, many retirees seem to have been reasonably well prepared for retirement in the sense that their income in their final years wasn’t substantially lower than their income in their late 50s or early 60s.
This raises a question, the researchers suggest: is the replacement ratio a sufficient statistic for the “adequacy” of retirement preparation?
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