Are you ready for some shocking
numbers? 75% of people between the ages of 51 and 61 will experience an event
like job loss, divorce, widowhood, new health issues, or the onset of frailty
among parents or in-laws within a ten year period. That number jumps to
two-thirds among those of us 70 years old or older. And finally, the risk is
even greater for those of us who are married and have the added risk of a spouse
losing a job or developing health issues.
These are the findings of a new paper
released in December by the Center for Retirement Research at Boston University
titled "When the Nest Egg Cracks: Financial Consequences of Health Problems,
Marital Status Changes, and Job Layoffs at Older Ages.
To me, these are some staggering
numbers. I think we all know that these things can happen but I doubt seriously
that anyone would put the odds that high if asked to put a number on it. Let's
look at the data from this report in more depth:
Health Problems
Serious health problems cause
out-of-pocket spending to increase and may reduce the ability to
work.
39 percent of terminally ill patients
reported their illness caused moderate to severe financial hardship (Emanuel et
al. 2000).
Half of Americans filing for
bankruptcy cited medical causes (Himmelstein et al. 2001).
About three-quarters of those who
declared bankruptcy in part because of medical bills had health insurance at the
onset of the illness. Insured adults at midlife spend more out of pocket on
health care, including insurance premiums, than those without coverage (Johnson
and Crystal 2000).
Older people devote more of their
income to health care than younger people, regardless of health status. For
example, 35 percent of families headed by an adult age 65 or older spent 5
percent or more of their income on health care (excluding premium costs) in
1996, compared with 19 percent of families headed by an adult age 55 to 64 and 9
percent of families headed by an adult age 25 to 54 (Merlis 2002).
Health problems compound the financial
burden of health care costs. Aged Medicare beneficiaries in fair or poor health
averaged $4,000 in annual out-of-pocket health care spending in 2003, compared
with $2,845 for those in excellent health (Caplan and Brangan 2004).
Medical expenses are especially high
in the last year of life (Garber, MaCurdy, and McClellan 1999), and often leave
surviving spouses with few financial resources (McGarry and Schoeni
2005).
Health problems force many older
Americans into early retirement (CBO 2004; McGarry 2004), and workers sometimes
have to cut back on their work hours to care for ill family members (Coile 2003;
Johnson and Favreault 2001; Johnson and LoSasso 2000).
In 2001, 35 percent of those
bankrupted by medical problems curtailed their employment, often to care for
someone else (Himmelstein et al. 2005).
Onset of Disability
In 2002, about 1.4 million aged adults
resided in nursing homes (Spillman and Black 2005), and another 8.7 million aged
adults with disabilities lived in the community (Johnson and Wiener
forthcoming).
Many frail older people have limited
financial resources. In 2001, 36 percent of severely disabled older adults
living in the community had incomes below 125 percent of the federal poverty
level, and their median household wealth was less than $50,000 (Johnson and
Wiener forthcoming).
Long-term care costs can be
staggering. In 2004, the average daily private pay rate for a semi-private room
was $169, or about $61,700 per year (MetLife 2004). Home health aides who help
with personal care activities charged $18 per hour on average in 2004. For the
typical user of paid services who receives 60 hours of paid care per month
(Johnson and Wiener forthcoming), annual home care costs total more than
$14,000.
Private and public insurance for
long-term care services is limited. Medicare covers few services, and people
must meet strict income and asset tests to qualify for Medicaid. People with too
much wealth or income to qualify initially for Medicaid can receive benefits
once they have spent nearly all of their resources on long-term care services.
According to one estimate, about one-third of nursing home residents ineligible
for Medicaid when they are admitted deplete enough of their assets to qualify
for coverage before they are discharged (Wiener, Sullivan, and Skaggs
1996).
In 2002, only 9 percent of adults age
55 and older had private coverage (Johnson and Uccello 2005).
Loss of a Spouse
In 2000, 17 percent of widowed women
age 65 or older received incomes less than the federal poverty line, compared
with just 4 percent of married women (Social Security Administration
2002).
Poverty rates at older ages are even
higher among divorced women than widowed women. In 2000, 20 percent of divorced
women age 65 or older had incomes below the poverty line (Social Security
Administration 2002). The share of divorced women in the retired population will
grow in the coming decades with the aging of the Baby Boomers, who have much
higher divorce rates than earlier generations (Butrica and Iams
2000).
Job Loss
Job layoffs in the years just prior to
retirement can have long- lasting financial consequences. People in their 50s
who become unemployed frequently have trouble finding other jobs (Chan and
Stevens 2001). Lost labor earnings reduce pension wealth, Social Security
wealth, and other savings, threatening retirement security.
Prevalence of Negative
Events
Nearly one-half of adults age 51 to 61
have health problems or frail parents or in-laws needing help with basic
personal care.
Medical conditions are nearly twice as
common at ages 70 and older as at ages 51 to 61.
Over a 10-year period, more than
three-quarters of adults age 51 to 61 at baseline experience negative shocks,
including widowhood, divorce, job layoffs, health problems, or the onset of
frailty among parents or in- laws (table 2). Health problems and layoffs
dominate at this age. For instance, 41.3 percent experience a major new medical
condition, 33.7 percent develop health-related work limitations, 25.9 percent
have parents or in- laws who become frail, and 18.7 percent are laid off from
their jobs. Few people in their 50s or 60s enter nursing homes or develop severe
disabilities. Only 9.8 percent of those married at baseline become widowed over
the period, and only 3.0 percent become divorced.
More than two-thirds of adults age 70
and older experience at least one negative shock over a nine-year period. About
half experience the onset of a major medical condition, with nearly one-quarter
developing heart problems. The onset of frailty and cognitive impairment is
quite common at older ages, especially among unmarried adults, and many enter
nursing homes. Among single adults age 70 and older, 29.0 percent become
severely disabled between 1993 and 2002 (or until they die), 16.7 percent become
severely cognitively impaired, and 31.8 percent enter nursing homes. In
addition, 29.1 percent of those married at baseline become widowed. Fewer than 1
percent of married adults age 70 and older become divorced.
The incidence of negative events rises
when the analysis accounts for spousal shocks. Among people age 51 to 61 at
baseline, 90.5 percent of adults married at the beginning of the period
experience a negative shock over a 10- year period or are married to someone who
experiences a shock. They become widowed or divorced, their parents or in- laws
become frail, or they or their spouses develop health problems, lose their jobs,
or enter nursing homes. Among people age 70 and older and married at baseline,
81.6 percent experience negative shocks to their own health or their spouses’
health over a nine-year period, they or their spouses enter nursing homes, or
they become widowed or divorced. Among married and single people combined, about
seven in eight adults age 51 to 61 at baseline and about three-quarters of
adults age 70 and older experience a negative individual or spousal shock over
the observation period.
Resulting Changes in Household
Wealth
Those who develop health-related work
limitations during the period report baseline median wealth of $93,929 (in 2002
dollars), compared with $131,816 for those who never report these limitations.
Real median wealth grows over the period by 17.1 percent for those who develop
health conditions that limit work and by 45.7 percent for those who do not.
Married adults with health-related work limitations at baseline experience even
less favorable outcomes: They start the period with median wealth of only
$67,092, which then grows by only 16.5 percent in real terms by the end of the
period.
Results from median regressions of the
level of household wealth in 2002 or the last interview reveal that job layoffs,
divorce, and the onset of health-related work limitations sharply reduce
household wealth for adults age 51 to 61.
What Does It All Mean?
If I think about my husband and I and
my extended family, I think many if not most of us would say that we have done
an adequate job of preparing for our later years. But looking at these numbers,
I think you have to reassess. Given these probabilities, is what we, or our
family members, have socked away really enough? Have we taken adequate
precautions in the case of long term health issues?
For me, the moral of this story is you
really have to plan AS IF one or more of these events will occur, not IN CASE
they do. Further, that planning isn't just about money but also involves legal
and emotional issues.
As always, I would like to know your
thoughts. Do these numbers surprise you? If they do, are there changes you need
to make now to account for the likelihood of a financial shock? What are they?
Please post your thoughts and comments below.
SOURCE:
1. Richard W. Johnson, Gordon B.T.
Mermin, and Cori E. Uccello. "When the Nest Egg Cracks: Financial Consequences
of Health Problems, Marital Status Changes, and Job Layoffs at Older Ages"
Working Paper
Center for Retirement Research at Boston College, Number 18; Released December,
2005.
http://www.bc.edu/centers/crr/papers/wp_2005-18.html
Kim Snider, Kim Snider Financial Communications, Chronim Investments
and/or Snider Advisors make no representation that the information and opinions
expressed are accurate, complete or current. The opinions expressed should not
be construed as financial, legal, tax, or other advice and are provided for
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