A crisis for the very old: They're outliving their assets

Nearly half of all Americans will die with practically no money at all. It's a problem that policymakers and financial services firms must address.




"The oldest old are suffering a great deal now," says Debra Whitman, an AARP expert on the financial issues facing retirees.



Economist James Poterba of MIT put it all together with colleagues at Dartmouth and Harvard's Kennedy School and estimated that about 46% of Americans die with less than $10,000 in assets, many of them lacking even home equity and relying almost entirely on Social Security.

The results can be measured in more than merely dollars and cents. Poterba's paper found that this group is "disproportionately in poor health," in part because they have no resources to cover medical expenses outside Medicare. Most shocking, many of these households were considered to have entered retirement in good financial shape; they didn't count on outliving their plans.


For example, the most commonly proposed "fix" for the program, embraced by President Obama and conservative Republicans alike, is to change its inflation index to one that produces lower cost of living increases. Because the difference resulting from the "chained consumer price index" builds over time, the effect of the change would be greatest on the oldest retirees.

Those retirees are already heavily dependent on the program: AARP's analysis of census data shows that about one-third of retirees ages 65 to 69 rely on Social Security for more than half their annual income, but the figure rises to more than 60% of those ages 80 and older.



Another blow delivered by the downturn is the long period of low interest rates that has followed, partially as a result of government efforts to jump-start the recovery. Because retirees' funds tend to be heavily invested in fixed-rate assets such as bonds, low rates eat those funds' value.

Remember the rule of thumb that retirement assets can be made to last 30 years if one withdraws 4% of their original value every year? That may not work when inflation-adjusted interest rates remain close to zero, as they are today, over long periods, or when the nest egg has been slashed by a third. (The 4% rule was developed by a California investment advisor in 1993, when average bond returns were more than 2% over inflation.)


But annuities have never been a popular option in the U.S., for several reasons. Americans have an aversion to locking away their financial assets indefinitely. "There's a psychological issue with taking something you've earned all your life and turning it over to an insurance company," AARP's Whitman observes.

Another is that annuities can be expensive, especially in low-interest-rate periods such as today. They represent a bet against an insurer that you'll live long enough to collect as much in monthly payments as you paid upfront; the insurance industry is plenty smart enough to stack the deck so that's unlikely to happen.


The virtue of an ALDA, however, is that it guarantees income late in life. Instead of trying to stretch a retirement fund into the indefinite future and risking dying in poverty, one can devote a relatively modest portion of one's nest egg to an ALDA and figure out how to stretch the remainder over a finite period of 10, 15 or 20 years. That's an easier calculation, which is why Anthony Webb of the Center for Retirement Research at Boston College, writing with his colleague Guan Gong, called ALDAs "an annuity people might actually buy."




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