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Today’s Retirees Face Unprecedented Challenges: Part One

Those retiring today face many challenges that earlier retiree generations did not have to think about. While Social Security and Medicare provide some critical benefits, newly emerging financial challenges will strain retirees’ budgets. As recently as the 1990s, financial advisors said that retirement savings of between $100,000 and $150,000 per couple would be sufficient to last the average retirement lifetime. Today, most financial advisors recommend minimum retirement saving for a couple in a range of just under $1 million to $1.73 million.

A report recently released by Fidelity Investments, states that the average couple retiring today at age 65 will need $280,000 over their lifetimes to cover out-of-pocket health care costs. This does do not include any costs for long-term or facility-based care, in-home health care, or dental care.

According to the Government Accountability Office (GAO), among households age 55 and older, 29 percent of households have neither retirement savings nor a pension of any kind. Around half of American households have no retirement accounts, IRAs or 401(k)s. The average retirement savings for those ages 56-61 is only $163,577, according to the Economic Policy Institute (EPI).

The Employment Benefit Research Institute estimates that Americans have a retirement savings deficit of $4.3 trillion. Social Security payments fall far short of meeting the minimal needs of today’s retirees, and considering the looming Alzheimer’s epidemic: 5.7 million Americans currently have Alzheimer’s, and by 2050, 14 million will be afflicted with the disease, for which Medicare covers very little-many retirees are apt to find themselves in dire financial straits.

We can understand the problem better if we consider the plight of today’s retirees compared to prior generations of retirees. In past generations, most people bought a home, paid off the mortgage and owned their home outright prior to retirement. Many retirees, due to life-time or long-term employment, had traditional employer-provided pensions in addition to Social Security and personal savings. Costs for daily necessities, including gasoline and food, were relatively low and were a much smaller portion of the overall household budget. Health care costs-visits to doctors, drugs, even costs for hospital care-were reasonable enough that most people could pay their own way even without health insurance. When retirees got sick or became old and incapacitated, most usually, their families housed and took care of them.

The realities facing today’s retirees are quite different. Here are 6 Challenges facing retirees today:

Today’s Retirees Are Often Strapped with Mortgage and Rental Costs

In the past, the majority of retirees bought a home, stayed put, and paid off their home mortgages prior to retirement, thereby escaping the pressure of high housing costs post-retirement. The most important single aspect affecting financial success in retirement is whether or not the retiree has a monthly payment for shelter, a mortgage or rent payment. Retirees who do not have this expense are considerably better off financially than those who do.

Homeowners who had paid off their home mortgages had the option of aging in place. They also had an option of trading down: selling their larger family home and paying cash for a smaller, less expensive house, which could also be in a less expensive locale, if desired.

The Great Recession had a tremendous negative impact on many older homeowners As many faced retirement, and as housing values fell by around 30 percent nationwide, many homeowners were unable to sell their homes without experiencing huge losses, and some, who still had mortgage payments, lost their homes to foreclosures, and became permanently priced out of the housing market.

As a result of the recession, the number of renters vs. homeowners saw explosive growth, and foremost among the increase in renters were seniors and retirees. According to the Metropolitan Housing and Communities Policy Center at the Urban Institute, the period from 2004 to 2014, saw the biggest renter growth in history, with households age 55 and older accounting for 42 percent of renter growth. The Institute sees the number of senior renters increasing to 12.2 million by 2030. And as the number of renters has increased, rent prices have escalated dramatically. Since the recession, the average monthly cost of renting a standard 2-bedroom apartment has risen from around $800 to a nationwide average of $1,350, with rates in some large cities, like San Francisco and New York, averaging up to $3,000 a month.

While much of the $9 trillion that was lost when housing prices fell during the Great Recession has been regained, on a nationwide average basis just 34.2 percent of homes have seen their values surpass their pre-recessionary peaks, which occurred in late 2006. More than half of the largest housing markets have regained all or most of their value, with a nationwide average gain of $61,000 per home. The increase in home equity in many regions has added to household net worth and helped to restore consumer confidence. Still, the household that was trapped in a home that was underwater or with a home that was impossible to sell without a big loss during that period, shelled out thousands of additional dollars in maintenance costs, taxes, and in cases of outstanding loans, mortgage payments that they otherwise could have avoided. Waiting for prices to recover before selling, was costly for many seniors, causing permanent reductions in their retirement nest-eggs.

Today’s Retiree Savings Accounts Bereft of Interest

Interest from savings has always been a critical component of retirement income. When the boomers’ parents retired, the bulk of their personal retirement savings were often in low-risk investment vehicles such as bank savings accounts, CDs, Treasury bills and the like. Throughout much of the last century, retirees could live on the annual interest earned by these safer investments – ranging from a low of about 3 percent to 10 percent, or even higher, annually-while not tapping into the principle amount. Five percent interest on $100,000 in savings would bring in an extra $5,000 a year, enough to make a difference. A report from Charles Schwab states that in a six years period, seniors lost $58 billion in annual interest income that might have come from these traditional low-risk investments.

Over the past decade and even today, these types of low-risk investments pay little if any interest – often less than one-half a percentage point. Retirees who need to take funds from their investment savings accounts to assist with living expenses, health bills, emergencies and the like, must dip into the principle.

Following the Great Recession, the Federal Reserve kept interest rates artificially low-near zero-percent-and this has been especially damaging to retirees. The Fed’s economic recovery program flooded the market with cheap funds made available to banks and corporations to assure their survival. Due to these widely available funds at very low borrowing costs, financial institutions have had no incentive to offer higher interest rates to attract retail customers. Only recently has the Federal Reserve begun to raise interest rates, and while interest rates charged for credit cards and loans have gone up over the past 18 months, most banks have not yet increased the interest rates they pay customers for deposits or savings accounts. This situation has also forced many retirees, desperate to earn interest any way they can, into higher-risk stocks and investments than they usually would consider, leaving them extremely vulnerable in case of another market downturn.

As Traditional Pension Programs Become Obsolete, Retirees are More Dependent Than Ever on Social Security

Social Security benefits are a crucial financial resource for retirees. According to the Social Security Administration, one-half of elderly Americans depend of Social Security payments for 50 percent of their income, and thirty-four percent depend on these payments for 90 percent of their income. The average Social Security payment in 2019 is $1,422 a month, or around $17,532 a year (government poverty level income for a single person is $12,140.) Social Security is not intended to provide sufficient income for retirement, but to supplement other income sources and to provide a safety-net protecting the poorest elderly from abject poverty.

In the past, retirees could often count on traditional employer-provided pensions in addition to Social Security, but today, according to the Employment Benefit Research Institute, only 14 percent of Americans are covered by traditional defined-benefit retirement plans. Around 50 percent of companies offered defined-benefit pension plans in 1998, but that number has dropped to 7 percent today. Within a decade or so, defined-benefit pensions will be virtually non-existent. That means that many of today’s retirees are more dependent than ever on Social Security as a safety net.

For the most part, traditional pension plans have already been replaced by 401(k) retirement accounts, which originally were intended to be a combination of employee contributions and the employer’s matching funds. Over the years, many employers have reduced their contributions and in a growing number of cases, the employer may function mainly as a facilitator for the plan.

Seniors nearing retirement age when the Great Recession came along, suffered severe losses and were left without sufficient time to regain those losses prior to retiring. Two major financial downturns within a 7-year period, each realizing about a 30 percent investment loss, were not kind to retirees’ 401(k) plans.

Today’s Retirees Less Well Off Relative to Buying Power

While TV ads by financial firms depict a Utopian retirement where everyone is a millionaire and living the life of leisure, that is far from reality. The U.S. Census Bureau reports that the median annual household income for Americans, age 65 to 74, is in the $40,000s; and for those age 75 and older, is around $30,000. Coincidentally, according to the Congressional Research Service, there are less than one million Americans, or 0.8 percent, who actually have retirement savings of $1 million or more.

Looking at price increases over the period, especially at the grocery store, it is clear that Social Security payments are falling far short of keeping pace with prices of necessary expenses for the majority of retirees. The U.S. Bureau of Labor Statistics says that a consumer needs $30.22 today to equal the buying power of $20.00 in 2000. In 2018, food prices were 51.09 percent higher than in 2000, with a price increase of 27 percent in the past 10 years, and of 14 percent in just the past three years. It is easy to see how the Social Security cost-of-living annual increase (COLA) system is failing to address the increasing financial needs of retirees.

In 2018, there was a price increase of 16 percent for bananas and an increase of 37 percent for eggs, bringing the prices of both to record highs. Shoppers are now paying around $1 each for items of fruit and vegetables: apples, oranges, peaches, tomatoes, etc. (last summer, the price of tomatoes hit $2.50 to $3.00 a pound in most supermarkets.) Kraft, Heinz, Campbell Soups, P&G and Smucker Company are all enacting price increases, which may include “stealth increases”-reduced container product amounts, often disguised with clever repackaging. According to Kelly Blue Book, the average new-vehicle cost increased by $687 in 2018, over 2017. We are also seeing price increases for Netflix and Amazon Prime memberships, airplane tickets, movie tickets, U.S. postage stamps, shipping fees from FedEx and UPS, auto insurance, prescription drugs, restaurant meals and many other items. Even Starbucks and Coca Cola have announced intended price increases for their beverages. It would not be far-fetched to say there is a Price Increase Epidemic. While these price increases affect everyone, their negative impact on retirees with fixed incomes is far greater.

Here is a list of goods and services that increased the most in price from the end of the recession in 2009 to 2017. Source: Bloomberg Businessweek

  1. Consumer banking services
  2. Investment and portfolio/money management services
  3. Tobacco
  4. Higher education
  5. Prescription drugs
  6. Gasoline
  7. Housing
  8. Hospital services
  9. Beer
  10. Pork
  11. Automobiles/Vehicles
  12. Sugar and sugar-based products
  13. Eggs

As the economy has recovered from the Great Recession, consumers have seen the most dramatic price increases in more than a half-century. Originally set off by a jump in gasoline prices, price creep has now spread to most categories of merchandise and services, including cheap Asian imported goods.

The government has reported low annual inflation over recent years-mainly less than 2 percent. In fact, Inflation was gaged so low that there were no increases to the Social Security COLA in 2009, 2010 and 2015, and only a 0.3 percent adjustment in 2016. This has left a gap between retirees’ buying ability and pricing reality.

The CPI used to measure of inflation and to determine the COLA, the annual cost-of-living adjustment for Social Security, contains a fixed market basket of goods and services. Research shows that this universal CPI is not the best indicator for the spending patterns of elder Americans. For example: seniors 65 and older spend twice as much on health care, and those 75 and older spend nearly three times as much, as younger consumers. And as Americans enter advanced age, they spend more on necessities and less on discretionary goods. A new CPI, designed specifically for retirees, could more accurately reflect seniors’ buying patterns and better address their financial needs.

When Today’s Retirees Become Ill and Incapacitated, Families May Not Be There to Help

Up until the mid-twentieth century the majority of families took care of their elder family members at home. A number of things have destroyed that model. With the dominance of two-wage earner households, there is most usually no longer an adult at home able to look after infirmed elder family members. Additionally, with the high costs of child care, the average family is unable to care for both pre-school children and elderly relatives-and in most cases, the children win out. The boomerang generation of Millennials still living at home long past college, further complicates the financial picture for many families.

As Boomers gained college educations, they became more professionally specialized and often moved from their hometowns, seeking better job opportunities. As a result, today, a retiree’s closest family member may be one or more states away, making it all but impossible for them to properly supervise and care for elder family members who are ill or need assistance.

As Alzheimer’s and other forms of dementias rapidly spread through aging populations, afflicted elders often need hands-on 24/7 care, best provided by a memory care or nursing home facility. But for the majority of middle-class Americans, that is not an option due to the high costs. Long-term facility-based healthcare can easily cost $100,000 a year. Unfortunately, Medicare pays little if anything toward the daily care or housing of Alzheimer’s or dementia patients and does not pay for in-home health aids or facility-based care. Families are left to struggle with the physical burden, emotional stress and astronomical costs of caring for elders with cognitive degenerative diseases as best they can, on their own.

As views of familial obligations change and as financial obligations often become overwhelming for many families, older family members often find themselves without support when they need it the most.

Financial Scams Targeting Seniors Show Explosive Increase

Con-artists have long preyed on vulnerable seniors who are widows or divorcees. But, now, most all retirees are being assaulted from every angle. From telemarketing scams to elder financial abuse by family members, retirees need to constantly be on guard to protect themselves and their money. Annually, $3 billion is taken from unsuspecting seniors by fraudsters. The AARP organization, and its AARP Foundation ElderWatch, actively try to inform and warn seniors about scams, offering advice on the organization’s Web site.

A recent article in the Wall Street Journal reports that many banks are now forming programs that train employees to be on the lookout for unusual financial activity regarding seniors’ accounts. For example, when a senior comes into the bank and wants to wire a large sum to a grandchild, who is believed to have had an auto accident in Mexico and is now in a hospital or being held in jail, the bank steps in to help. This is known as “the grandchild scam,” where someone, who claims to be helping the grandchild, calls and asks for money. Sometimes the person calling even impersonates the grandchild (through Social Media, it is easy to find out the names of grandchildren). Government data indicates that these types of crimes have more than doubled in the past five years.

Robocalls and telemarketer phone calls target seniors more than any other consumer group, offering get-rich-quick investment schemes, offers for “free” medical equipment, and computer assistance with a problem “they” have identified-if retirees will turn over their personal information and pay a fee. (2018 saw an increase in robocalls of 50 percent over the prior year, to 26 billion.) Computers are also a hot line for senior fraud. Online dating sites serve as portals for crooks trying to con lonely seniors, both female and male, out of their life savings, and they succeed more often than one would think. Assets lost in this manner are rarely regained.

No doubt, the wide-spread perception that all retirees are millionaires, an image projected in popular investment house advertising, helps make seniors targets for the dishonest. While in the past, company-provided defined-benefit pension plans paid out only monthly amounts to participants, with today’s 401(k) plans, retirees can access the total amounts of their retirement funds at any time if they wish to do so, making these plans targets, vulnerable to plundering by scammers.

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