Implications from the Older Adult Survey

Some of the findings in the Older Adult Survey raise concerns about the ability of some older adults to maintain their financial footing, meet unanticipated expenses, and save for the future. Compounding these concerns are issues related to the financial decisionmaking practices of older adults and the risks they face for cognitive decline as they age.

Middle-aged adults are particularly susceptible to financial stress. Respondents in their 40s and 50s were more likely than those 60 and older to report experiencing recent major financial stress such as "losing a job or having work hours and/or income reduced," unpaid taxes, filing for bankruptcy, and receiving a foreclosure notice on their homes. They also were more likely to report needing help covering the costs of bills and expenses in the past year. Other research is consistent with these findings. For example, a recent Pew study examined the financial burdens of the "sandwich generation," defined as adults with a living parent age 65 or older and either raising a child under age 18 or supporting a grown child. About 70 percent of members in the sandwich generation are in their 40s and 50s. Among those who are providing financial support both to an aging parent and a child, almost one-third (30 percent) reported that they are "just able to meet their basic expenses" and 11 percent say they "don't have enough to meet basic expenses."⁶³

It is notable that many older adults carry debt late in life, potentially undermining their financial security. One-half of credit card users carry balances. Also, one in eight carry student loan debt for themselves or their children--a trend other research suggests is increasing. Furthermore, owning a home outright by late middle-age is no longer the norm. Though not necessarily a sign of financial stress, substantial numbers of older adults carry debt secured by their homes, including six in 10 of those in their 60s and nearly four in 10 of those age 70 and older. Data from the SCF also indicate that the share of older adults with mortgage debt is growing and extending beyond late middle-age.

Mortgage debt is of particular significance because homes comprise the largest component of net worth of many older adult households. During the recession, the sharp drop in home values was estimated to have erased an estimated $7 trillion in home equity among homeowners of all ages.⁶⁴ Recently, home values have started to rebound.⁶⁵ However, more than one in five residential properties with mortgages were still "underwater" at the end of 2012, meaning that more is owed on the mortgage than the home is worth.⁶⁶ Overall, this has resulted in a significant reduction in, or even elimination of, some adults' housing wealth that was previously available to help fund retirement or other expenses. As this debt cannot currently be fully paid off by selling the home, it further reduces the funds available for retirement.

Retirement savings may be at risk in other ways. The survey finding that some older adults may not be able to, or may not choose to, meet an unexpected $1,000 expense by drawing on available savings raises the question of whether retirement accounts are viewed as a source of emergency funds. While not addressed explicitly in the survey, other research suggests this may be the case. Using the SCF and Internal Revenue Service (IRS) tax data, a study by Federal Reserve Board and IRS economists found that, even prior to the recent recession, there were significant withdrawals from retirement accounts among families headed by someone age 55 or younger. Families that experienced an income shock, particularly lower-income families, were found to be more likely to take withdrawals.⁶⁷ A study by Fellowes and Willemin, which used the Federal Reserve's SCF and other government data, found that one-quarter of households with a 401(k) or similar plan have used their retirement savings for non-retirement needs, and that workers ages 40 to 49 were the most likely to tap their accounts.⁶⁸ A Demos study of households with credit card debt found that 18 percent of those ages 50 to 64 drew upon their retirement funds to pay their credit cards.⁶⁹ What is not clear from these studies is whether older adults who tap retirement funds early are aware of the full costs of their decision.

Some financial decisions--such as refinancing a mortgage, managing investments, or retiring--are complex and have long-term consequences. Yet, barely one-half of older adults who refinance or who have investments seek advice when making these decisions. Other studies have shown that many older adults do not seek advice in preparing for retirement.⁷⁰ The Older Adult Survey further found that many older adults appear to avoid preparing for end of life. The oldest respondents are more likely than middle-aged respondents to have a will, but a substantial share across all the age groups do not. And, eight in 10 respondents, including many of the oldest, do not have plans in place in the event they are unable to make financial decisions.

Many older adults are confident in their decisionmaking abilities--a sentiment that may be appropriate for some, but misplaced for others. The survey indicates that the majority of older adults, including those in the oldest age groups, handle their own both routine and major financial matters. This occurs even as research suggests that financial decisionmaking ability for an individual may decline before he or she is aware of it. Confidence in decisionmaking may, in fact, belie vulnerabilities on the part of some older adults who lack the ability, knowledge, or preparation to make sound financial decisions.

In summary, these implications point to a need for a broad set of responses to help ensure the financial well-being of older adults. Many actors have a potential role to play in developing or implementing these responses. Financial institutions, for example, may recognize opportunities to offer new products or adapt existing ones tailored to a growing older adult population with varied cognitive abilities. For-profit and non-profit advisors may explore new methods and delivery channels for providing sound advice about financial risks and rewards. Policymakers, for their part, may encourage various stakeholders to work together to address current and future financial needs of an aging population.

References

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