With the baby boomer generation just starting to enter an uncertain retirement, what can we learn from the finances of current elderly Americans?
The good news is that most older Americans (age 65 and above) have their finances under control: According to the latest data, about 60 percent of elderly households spend less than their incomes.
On the other hand, there were some -- in 2009, more than 14 percent of older households -- who spent considerably more than their income: at least 175 percent, in fact. Not that spending more than income in retirement is necessarily a problem. People with healthy retirement assets can afford to spend more than their income, and many do so comfortably. But many of those households with income shortfalls also have much lower levels of assets to draw from, and as a result, they tend to spend down their liquid assets at a faster rate than households with no income shortfalls.
Moreover, those with lower incomes have a much higher likelihood of running into an income shortfall: Two-thirds of households age 65 or older in the bottom-income quartile (66 percent) had income deficits, compared with less than 7 percent for those in the top-income quartile. This higher spending is driven by home- and health-related expenses, which are frequently more difficult to cut back than other types of expenses.
Who is most at risk of having a deficit? The elderly who are single, those households with no pensions, and aging African-Americans and Hispanics.
These findings come from a recent EBRI analysis of two different datasets tracking the income patterns of older U.S. households from 2001 through 2009, before the official end of the economic recession. The EBRI analysis further documents the significance of Social Security as a retirement income source. For all age groups above 65, Social Security remains their primary source of income: In 2009, households ages 65-74 and households headed by individuals age 85 or above received 54 percent and 66 percent of their total household incomes, respectively, from Social Security benefits.
Not surprisingly, the importance of Social Security income increases with age. For households with members ages 65-69 in 2001, the share of household income derived from Social Security rose from 47 percent in 2001 to almost 60 percent in 2009.
Ultimately, of course, most of the current elderly are still living within their means -- but some are not, and these seniors might face a very difficult retirement.
Supdipto Banerjee is research associated at the nonpartisan Employee Benefit Research Institute in Washington, DC. His recent analysis of income of the elderly is published in the February EBRI Issue Brief, at www.ebri.org