Why So Many People End Up Poor In Retirement

There’s a lot of discussion about the number of Americans who enter retirement financially prepared. There are surveys of people that give their self-assessments of their financial position. There are studies of data obtained from the IRS or the Federal Reserve. But one study points out that all these views take the wrong approach. They shouldn’t look at the amount of wealth or income people have at the start of retirement. They should look at the resources people have at the end of life.

This interview with a co-author of this study provides some interesting insights. The study concluded that a high percentage of Americans essentially die poor, with $10,000 or less in assets. The problem isn’t that people start with retirement with insufficient assets. The problem is that they aren’t prepared for surprises or don’t have enough of a cushion. They have adequate income and assets for their expected expenses when they retire. But in the last years of retirement there tend to be a number of financial shocks or unexpected expenses, many of them health or medical related. Many people also overlook that their homes will need substantial repairs or renovations during retirement.

While retirement planning generally assumes a steady draw down of assets, the truth is that spending is far more dynamic and variable. When a portfolio and plan aren’t prepared for this variability, finances can suffer. The interview also covers topics such as why people don’t buy annuities when almost all economists agree they should and why the aging of the Baby Boomers won’t cause a stock market meltdown.

Poterba projected that demand for equities in the years 2020 to 2050 would not decline sharply, arguing that age-wealth profiles would decelerate only gradually—in contrast to the robust surge in asset values on the way up, as the age and wealth of the baby boomers swelled in the 1980s and ’90s.

Market developments since the publication of his research has not altered in any way Poterba’s conclusions.

“I think it is very important not to take a narrow national perspective on this. We live in a global capital market. If there’s an aging population in Japan, they may be able to invest in assets supplied in other countries,” Poterba says.