Finances of retired households
MetadataShow full item record
Retirement income can be affected by a number of wealth- and income-impacting events. Recent economic and political events show that retirement income can be affected by policy changes, economic fluctuations, and poor investment decisions. To better understand the effects of these events, this research investigated numerous potential wealth- and income-impacting events faced by U.S. households. These include potential changes to Social Security benefits; potential default of pension plans; decrease in the value of a household’s primary residence; financial market downturns; and increases in out-of-pocket medical expenses. Despite much research on the retirement wealth of U.S. households, there is limited literature on the effects of potential threats to that wealth. Further, there is no research that simulates the effect of the simultaneous occurrence of several wealth- and income-impacting events. To inform this gap in the literature, this study used the 2008 Health and Retirement Survey to annuitize financial and non-financial assets of retired U.S. households. Household income, consisting of income and annuity inflows, was estimated in the presence of five wealth-impacting events. Then, a series of multivariate analyses estimated the differences in retirement income before and after the application of the potential economic or policy shocks. The results indicate that most wealth- and income-impacting events affect the youngest and the least affluent households in the most significant ways. All events increased the percentage of households that were not able to generate income above the poverty threshold. However, two scenarios stood out as particularly troubling for retirees: the possibility of multiple and simultaneous shocks and increase in out-of-pocket medical expenditures. Both of these scenarios moved numerous households from income quintiles 4 and 5 to incomes below the poverty threshold. Income inequalities varied based on the type of event simulated. Changes to Social Security benefits, pensions, and changes to home equity and annual returns had minimal impact on the Gini coefficient. However, out-of-pocket medical expenses and the multiple and simultaneous shock scenarios were associated with increased income inequality.