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A 2021 Society of Actuaries study on retirement risk looked at retiree vulnerability to unexpected financial shocks. Forty percent of retirees reported experiencing some form of financial shock.
They reported that 11% of retirees reported financial shock that reduced their assets by more than 25%. Thirty-two percent of retirees said they could not spend $10,000 without it affecting their retirement security.
I think about financial “what ifs” all the time. I try to anticipate where money might come from to handle even something major like long-term care. My homeowners insurance on Cape Cod has a $35,000 hurricane damage deductible, that would be a (not insurmountable) shock, but still a shock.
I can’t conceive of an event that would reduce our assets by 25% except a major market crash – unless Connie gets tired of me after 56 years, then we are talking more like 50% and the Cape house is the first to go.
Those survey numbers are shocking to me. Think about it, a $10,000 financial emergency may affect retirement security. That is living pretty close to the edge in my opinion. It would be interesting to know the total financial picture for these retirees. Did they retire too early? How much income replacement did they begin retirement with?
Is it fair to judge? Were they fully prepared for retirement or is such a financial situation more typical than we may realize?
We will never know, but 32% with very limited resources is not good IMO.
Obviously, income and asset levels are important factors, but given the relatively high reported level of shock events – an admittedly relative term – have you contemplated your ability to deal with such situations?
Can you think of a financial shock not covered by insurance or cash reserves that would jeopardize your or a survivors retirement?
Let us begin this post with the following:
https://www.pewtrusts.org/-/media/assets/2016/06/payday_loan_facts_and_the_cfpbs_impact.pdf
This is a report from the CHPB, the regulator of Payday loan companies. The info is garnered from reports these lenders make to their regulator.
Per the report, 12M individuals use these lenders at least once each year. The borrowers are paying $9B in fees and interest. These are generally people who have maxed out their credit cards, and then still can’t make it until their next paycheck.
Per Nerd Wallet, 27% of those with credit card debt pay only the minimum.
Since the day I got a BankAmericard back in 1970, I have never paid a cent in credit card interest. I am sure that most of those who read HD have a similar history.
There is a great financial canyon in this country which divides the population into two groups; those with wealth and those without. When I was growing up, there was more of a third group, the middle class. My dad worked at Douglas Aircraft and I remember him coming home excited to have been promoted to a position in which he would make $3/hour. Mom was a secretary making $288/month. On this income in 1952 they were able to own one car, own a home they bought for $10,500 on the GI bill. We were not rich. They had no credit cards.
There is a story in the news today about Bank of America increasing teller pay to the $24-25/hour range because they are unable to keep these positions filled.
There is a lot of evidence around that a lot of people are really struggling and one cannot just dismiss it saying I don’t believe in surveys. Do you remember when you first started seeing beggars standing on the islands in the middle of roads with signs asking for $$?
I think many comments here and the definitions used for paycheck to paycheck make it plausible to question surveys such as those quoted.
Living to only pay for basic necessities with no money for anything else is one thing and no doubt there are people in that category, but it is not 70% or anywhere near it.
If the money available is all used each month including beyond necessity spending – even if on credit- that is quite another matter.
Further, if a family saves first, has emergency funds and retirement plans and then lives P to P, it is not a problem in my opinion assuming not paying credit interest. That is living within one’s means.
I go back to the macro view. Somebody, not the wealthy alone, is keeping businesses providing goods and services beyond necessities in business.
We got a bit off track here talking about paycheck to paycheck. Here is a typical definition.
”Living paycheck to paycheck means that an individual’s income is just enough to cover their basic expenses like rent,utilities, food, and transportation. There’s little to no money left over for savings or unexpected costs.
In essence, it’s a situation where a person’s income is barely sufficient to meet their immediate needs, leaving them financially vulnerable to any unforeseen circumstances.”
If that is true, there is no way the economy can keep humming along, DisneyWorld can be crowded, vacations taken or unnecessary stuff purchased if “most” or 70% of Americans live that way. It just doesn’t add up. 20% perhaps, but not near most or even half.
A recent survey by LendingTree found that 45% of Disney goers with children under 18 took on credit card debt to pay for their trip. The fact that they didn’t have enough savings to pay for the trip supports the notion that they view themselves as living paycheck to paycheck. Perhaps what you are failing to take into account is that a large number of Americans are using a significant part of each paycheck to pay their minimum required credit card payments.
I don’t doubt that, but if that is the case, the money used to pay credit cards is beyond the definition of paycheck to paycheck, right?
Whether money used to pay credit cards is within your definition of P to P depends on what the money was spent on, not whether is was via cash, check or credit card.
Why would a credit card payment not count as an expense just like a mortgage or car payment? Living “paycheck to paycheck” simply means spending all your income so you are unable to save anything extra.
Sure it is an expense, but it is not a basic expense of living P to P, it’s extra non- necessity spending simply delayed by charging it. P to P means you can only pay for basic living expenses.
That is the basic problem. Mis- definition of P to P. By your use of the term anyone can live P to P and many wealthy do. That is also why IMO the survey % are so high claiming to live P to P because they include discretionary spending. I spend all my income each month. Is paying expenses on a second home living P to P? Not in my book.
Because someone used credit cards ti buy food doesn’t mean it wasn’t a necessity.
Whether money used to pay credit cards is within your definition of P to P depends on what the money was spent on, not whether is was via cash, check or credit card.
I think that is obvious.
To me, “paycheck-to-paycheck living” means there’s nothing left over at the end of the month — the family’s entire income has been spent. Dick, you seem to want to argue that folks are only living paycheck-to-paycheck if their entire income is going toward fixed costs, with nothing for discretionary spending. But this is slippery ground. If folks set their thermostat at 69 degrees during winter, rather than 68, is that discretionary spending? If they buy name-brand potato chips, rather than generic, is that discretionary? Folks may be foolish in spending their entire income. But I don’t think we’ll get far by quibbling about how they’re spending their money.
If that is correct, then the term is meaningless as it tends to be used for policy setting implying financial struggling, lower income, etc. To me the broader definition should mean that many who claim P to P can be saving first for the future and emergency expenses. In other words, in many cases P to P is self imposed and irresponsible, not an indication of economic struggle.
As I mentioned, looking at all money in and out during a month, I could claim living P to P which, of course, is silly when considering how the money is spent.
If you are correct, it may explain the high percentages claiming P to P living, but it sure makes the data questionable when it comes to financial/retirement issues and planning.
[I]n many cases P to P is self imposed and irresponsible, not an indication of economic struggle. R. Quinn
Your comment brings to mind other attitudes that, fortunately, are not as widespread as they used to be.
In many cases being overweight is self-imposed and irresponsible, not an indication of struggling with stronger than average physiological food cravings.
In many cases alcoholism, gambling addiction and mental depression are self-imposed and irresponsible, …..
That’s not fair. My comment was mentioned in the context of the remark that living P to P is not limited to necessities. So, if living that way is because over spending beyond basic living expenses, then it is, in fact, self- imposed.
If people “feel” they’re living paycheck-to-paycheck, well, that’s what they feel. I don’t think we’ll get anywhere by belittling their spending choices. More interesting questions: What’s pushing them to live that way — corporate marketing, social media, etc.? Given that living without any financial cushion is stressful, why don’t they change their spending behavior? Is there an effective way to encourage folks to behave better?
I think the point of your post is there is a crisis because most retirees would face increased financial stress if they incurred unexpected expenses. That’s how most of the world has lived since the beginning of time. Nothing new or interesting about these numbers.
Why?
Will you believe Forbes?
“A 2023 survey conducted by Payroll.org highlighted that 78% of Americans live paycheck to paycheck, a 6% increase from the previous year. In other words, more than three-quarters of Americans struggle to save or invest after paying for their monthly expenses.
Similarly, a 2023 Forbes Advisor survey revealed that nearly 70% of respondents either identified as living paycheck to paycheck (40%) or—even more concerning—reported that their income doesn’t even cover their standard expenses (29%).
Also: “… nearly half (49%) of Baby Boomer respondents—who are nearing retirement or already retired—say they’re living paycheck to paycheck. That’s a higher percentage than any other generation.”
I believe those results reflect what the participants said. I don’t believe the responses are an accurate reflection of their finances in term of P to P. Here is another survey that says 89% of Americans save on a regular basis. How can both surveys be true?
Both are true because much if not all of the saving while working is for periods without employment or after employment ends (if you are a retiree). Modigliani called this the life cycle, and consciously or unconsciously, all are at risk who ignore it.
That survey also says: “Less than half (45%) of Americans would be able to cover a $1,000 emergency expense without turning to a credit card or loan” and “An estimated 155.6 million (60%) Americans lack a retirement-specific savings account.”
All of which tells us what? Surveys are questionable at best in my opinion.
If you feel that way then why did you start this thread without making any mention of your disdain for survey data?
The point was is the reader able to handle a financial crisis, just provided the point of reference available.
Wasn’t the whole basis of your thread a Society of Actuaries survey?
The basis was to ask the question of individuals about how they would handle a crisis and to get people thinking about the question. Anyone is free to use the survey for comparison or not.
This is a good discussion. When I read Dick’s post, I felt it came from a place of concern, and from his HR background. To answer his question about if we could absorb a $10k expenses without it affecting our retirement, yes, I think we could, but it was not always so. The only thing that I think would really affect things would be if one of us were diagnosed with a medical condition like my brother in law who has ALS. They have been carefully planning for their retirement and things got turned upside down through no fault of their own. Chris
I also thought a lot of the comments brought up some good points that I agree with. One thing that hasn’t been mentioned is we are younger boomers who are the first folks who had our retirement changed from pensions to 401k and we were not finance people so it took awhile to get educated. I have had to learn about 401k, Roth, HSA and other things that our parents’ generation didn’t have to deal with. You can bet our kids got educated. Chris
Chris, barely half of non government workers ever had a pension and they did not have 401k or IRAs either. Those with pensions were mostly workers in large heavily unionized organizations.
People like me with a pension based on decades of work with one company were always rare and virtually non existent today.
I checked, and the article I’m reading says 60% of private sector workers in 1980. If you add government workers (why do you keep discounting them?) you’re likely at three quarters of all workers.
I had a pension, as did everyone else in my megacorp, up until the late 90s when they started cutting back on retiree benefits. And it was absolutely not unionized. At all.
That is interesting. The men in Spouse’s and my families did have pensions going back a few generations, but some of them stopped when the men died, no survivor benefits. Chris
I don’t think it’s shocking at all. Most people live paycheck to paycheck, including retirees.
According to a Federal Reserve Bank study of household wealth published in 10/23, the median net worth for households of those who are 75 or older is $335,600. Median, of course, meaning the mid-point with half above and half below this level. The 2020 Census showed about 23M people of age 75 or more. Given the percentage of single people in this age group, I think it is safe to assume that there are millions of households without the wealth of the average reader of Humble Dollar; people who couldn’t come up with $10K.
But, even readers of Humble Dollar might experience an event that could worry them. For example, a small asteroid hitting the ocean off of Cape Cod, would ruin your day/life. These are Black Swan events and you cannot really plan for them. And, these very rare events don’t have to be in your local area. I am sure that a major EQ (M8) on the Southern San Andreas Fault would mean a very large drop in the stock markets since Southern California represents a big chunk of our national economy.
But there are also potential non Black Swan risks that we might have to face….
All HO insurance policies exclude the risk of flood which is usually defined to include “water that backs up from sewers…”. Sewer backup insurance may be available as an option, but many don’t know or choose not to buy. Coming home an finding a foot of sewage inside your home and not having it covered by your insurance would not be a good day.
Thus, it is wise, even for those with healthy finances to have some flexibility in how they invest to allow for handling the unexpected and rare bad day.
I am skeptical of all surveys, but assuming that the $10,000 number is accurate, the question is why? How can people work for 40 years or so and not accumulate a modest amount in assets?
My parents were modest income, they had no investments no pension. When my father was forced to retire they lived on SS until they died. They survived by living with my sister’s family, but when my mother died there was $30,000 in the savings account, a lifetime of modest saving.
Agree that it is difficult to comprehend the “why” behind not having saved enough over a 40 year working career – or at least enough to easily be able to handle a $10K lump/emergency expense without destroying the entire retirement plan. The obvious answer would be failure to live below their means for the majority of those decades, student loan debt, auto loan debt, mortgage payments, non-stop CC debt all combined to tilt the balance out of favor to have anything remaining each month after servicing all of that debt while continuing to live above their means along the way. Too many tugs from society, peer pressure, and companies vying for the remaining discretionary income tipped the scales out of favor for far too many households.
As mentioned, a little bit of luck along the way perhaps was missed as well. I can easily drive around the neighborhoods of my town and see sitting in the driveways and side yards plenty of the “why” via gadgets, toys, trucks, too many cars to fit in the driveway, campers, boats, motorcycles, multiple riding mowers, etc… not to mention what probably resides inside the homes, garages, and sheds that most likely are all filled with “stuff” purchased on credit. Fiscal discipline is a muscle that requires non-stop continued training for it to grow, develop, and work. Those that fit in the “why” category have never found that muscle.
Despite the ACA you need to add medical debt to that list. “Roughly 530,000 people reported falling into bankruptcy annually due partly to medical bills and time away from work, according to a 2019 study from the American Journal of Public Health” – from this.
Given the number of Americans living paycheck to paycheck, why are you surprised?
That requires a separate discussion and no doubt controversial.
That is self-reported information and while they may be living P to P, our tendency to assume it is because of income limitations can’t be right if you look at consumer spending, look at the types of businesses being supported, etc.
Yes there are poor and very low income people- more than should be- but there are not 70% or so Americans living P to P out of pure necessity. IMO
You can either choose not to base anything off self-reported data or you can accept that it might be self-selecting and self-edited and thus different sources may be inconsistent.
Regardless it seems you are doubling down on an idea that you can’t be living P to P if you can take vacations, have anything other than most basic goods etc. That’s not how “trained” consumers approach the world. There is a whole world that has taught them to maximise consumption, treat themselves, enjoy material rewards for hard work etc. Going back to the thrift thread – yes the prudent and thrifty are cut from a different cloth or have successfully deprogrammed themselves. But there are people everywhere, perhaps on your street who regardless of income are cutting it very fine. Sometimes that may be of necessity, unstable employment, lots of dependents etc. But other times it’s because they are trying to live the American Dream. Personally I think they are fools but it doesn’t mean they don’t sometimes win – their vanity house leveraged to the hilt appreciates more than my more modest one for starters.
The American economy is built on consumerism, so it’s hardly surprising that people consume. It also explains the angst about the falling birthrate – the economy needs more and more consumers to sustain itself.
I’m not sure if your comment is a dig at the US or not, but every economy is build on “consumerism”. I’m pretty sure that’s what an economy is, by definition.
Well of course anyone who is saving and for their future and not, as a result, maximising consumption (there’s always a Bentley you could buy) is digging at the western capitalist model by becoming a mini capitalist themselves rather than a useful cog in the wheel/indentured servant.
But in my travels I would say that the US tends to do consumption best from size of vehicles to meal portions (&ubiquity of food outlets) to backyards full of rarely used motorized toys. That’s not to say that e.g. the rising Chinese middle classes aren’t aspiring to do the same nor that lots of Europe swiftly follows US trends.
There’s an interesting article on consumerism here.
Summary: “Consumerism is the propensity to consume and keep consuming. It is the drive to buy and own more stuff and to define one’s identity through what they own. Economists view consumerism as a positive for consumer spending and GDP growth. Others like psychologists and sociologists, however, see negative effects of rampant consumerism ranging from creating anxiety in individuals to social ills.”
I would suggest that GDP growth is not necessarily the best measure of a healthy society. I would also suggest that at least a partial rejection of consumerism is necessary for people to save rather than spend.
Your figures are also self-reported.
Suggest reading Barbara Ehrenreich’s “Nickel and Dimed“. It’s from 2011, but I doubt things have changed much.
That was an awesome book, but it was written in 2001.
To this day I still leave big tips for hotel maids.
“Nomadland” was a wonderful movie along the same lines, about itinerant RVers moving from place to place working backbreaking jobs at Amazon fulfillment centers.
I loved that book- it was both sad and, in places, humorous in a morbid sort of way. And I agree that the only thing that might have changed is that things may have gotten worse. Along the same lines is Breakfast at Sally’s (as in people, including families with young children, who depend upon the Salvation Army for daily meals and mostly live in their cars).
I’ve recently become more attuned to cars I see that look like they are being lived in – basically applying the “if it’s messier than my car maybe it is a home” test. There are lot more than you might think and of course not as visible as homeless urban encampments unless they are always parked in the same place.
Of course the vanlife movement has given an alternative to some as well as the self-aggrandising humble lifestyle merchants.
https://www.google.com/search?q=breakfast+at+sally%27s+by+richard+lemieux&ie=UTF-8&oe=UTF-8&hl=en-us&client=safari
I’ve had tax clients who suffered huge dental costs, 30k or a bit more, but like your hurricane deductible, I wouldn’t like it, but it wouldn’t change our lifestyle.
So long as we’re both alive, SS pays for everything, so a crappy market isn’t a concern. When one of us croaks, the survivor will then require a modest IRA distribution. A bear market could potentially impact lifestyle, but with a year or more worth of cash on hand, she/me should be okay.
Thirty-two percent of retirees said they could not spend $10,000 without it affecting their retirement security.
Financial security is spending 7K to covert to central air (from a single window unit downstairs and sleeping on the couch on hot nights) because your 102 year old mother in law moved in with you in the spring (and you were planning on doing eventually) without blinking and eye.
We are blessed (but we were frugal while saving for retirement).
I suspect you express shock (although accept this may be a literary conceit) because you come from a well padded corporate American lifestyle. Many contributors on this forum will be similarly well or adequately provisioned.
But the reality is that there is a large number of people who probably depend on SS/small pension exclusively in retirement and through life events and poor past decisions probably don’t have much in the way of a backup fund or investments.
What should they do? Never retire regardless of redundancy, health or care responsibilities?* Do you want your drive through coffee served by an exclusive crew of octogenarians?
People get by. I don’t think it’s fair to judge others. Just be grateful for your privilege. Try to educate those of younger generations that you can but don’t seek affirmation by punching down on those who are too late to materially improve their position.
*The whole of life is a game of risk management. And for me at this stage in my life the biggest risk is not what if I am adversely affected by financial events in retirement but whether I fail to get a decent time retired.
BBB – so many great points here. Don’t forget white privilege as an advantage if/when dealing with the impact of an unexpected $10K expense.
As I’ve written before, I dealt with an unanticipated and expensive divorce. It wasn’t a black swan event, but it certainly required me to make lifestyle adjustments and re-think my retirement plan, but I’m now happily remarried and far better off then I thought I would be. I’ve been incredibly fortunate.
No doubt there are many living on the edge in retirement. But where is your answer to the question?
I have said many times how fortunate we have been, how grateful we are for the absence of bad luck and misfortune in our lives.
However, it is not privilege that had anything to do with it. If you read many of the life stories on HD you will see some very difficult times and how people coped and overcame one obstacle after another over many years. I don’t see much privilege.
I think I’m probably using the word “privilege” broadly to encompass those blessed with thrift genes, good/lucky choices of life partner (divorces can be ruinous to financial health), escaped major health bills etc.
What’s the question of the many you asked? Can I foresee a financial event that would jeopardize my retirement?
Yes, of course. Putin chucks a few nukes around. An AI bad actor runs amok in the digital financial system. I get sudden onset dementia yet live for another 40 years.
Doesn’t mean I’m going to try to provide for all these scenarios. The world might be farked for all but the young, fit and ruthless willing to use a shotgun to get what they need anyway.
Yeah, and then then there’s that!
I think you both make excellent points. BBB, you are correct that we shouldn’t judge and we should seek to educate.
Grumpy old Quinn is also correct in that HD’ers aren’t all from privilege. Our combined incomes never exceeded $130k, and our combined pensions are a whopping $460 per month. Careful planning and saving, life in a low cost city, and some good luck have put us in a pretty good place.
I think “some good luck” is an overlooked part of this story. It strikes me that most Americans work hard — so many folks work long hours or have multiple jobs — but whether that hard work translates to financial success depends, in part, on a combination of good luck and the absence of bad luck.
Yes, I don’t like the term luck, but you are right, stuff happens sometimes that is truly beyond a persons control and sometimes cumulative. I have a relative who can’t seem to catch a break their whole life.
However, there are many who fight hard to overcome that bad luck and others who do not and go on making poor decisions compounding the bad luck.
We read even on HD retirees who say live whole or mostly on SS and are doing okay. Then there are younger couples both working who can’t save, who say the live P to P. Yes, there are different expense levels, but I just don’t think we look closely enough at discretionary spending when assessing ability to save or P to P living.
Our combined income rarely exceeded 100K, (both either our children, or their spouses individually already exceed this level), but we are comfortably well off in retirement.