Most older Americans are vulnerable to a financial shock, study reveals

The study, which examined data from 2014 to 2020, paints a concerning picture of the financial health of older households. Despite modest income growth over the years, the majority of older Americans lack sufficient resources to weather significant financial setbacks. The bottom 20% of households — approximately 11 million — had no assets whatsoever, while the rest (21-80%) experienced decreases in financial assets between 2018 and 2020, the study found.

Even more alarming is the fact that 49.6% of those age 60 and older had household incomes below the Elder Index in 2020, meaning they lacked the income needed to afford basic living needs in their geographic area. This represents a 4.6% increase from 2018, indicating a worsening trend in economic security for older adults.

Financial shocks, defined as large, sudden losses of net worth, pose a significant threat to older adults' economic stability. Over a 20-year period, more than 25% of adults age 50 and over will experience a shock resulting in a 75% or more drop in net wealth, the study found. For those 70 and older, the risk is even higher, with more than two-thirds experiencing at least one shock with financial consequences over a nine-year period.

These shocks can take various forms, including:

• Unexpected health issues.
• Loss of income due to widowhood.
• Changes in work and retirement plans.
• Long-term care needs.

The COVID-19 pandemic exacerbated these risks, with 11% of people 65 and older losing their jobs during this period. Older adults also faced more severe health impacts, including a higher risk of contracting COVID-19, increased risk of complications and death and higher rates of reported loneliness — a major risk factor for poor health outcomes.

One of the most significant and persistent costs burdening older adults is long-term services and supports (LTSS). While many Americans underestimate the need for LTSS, the reality is stark: Over half of adults 65 and older will need LTSS for less than two years, and about one in seven will require care for more than five years.

The financial implications of long-term care are staggering. In 2024, the average yearly cost of a private room in a nursing home was estimated at $120,304. The average annual cost of a home health care aide was $77,769. Costs continue to rise annually at 3% or more.

Despite these high costs, the study reveals that 60% of adults would be unable to afford two years of in-home LTSS. Even more concerning, the vast majority of older Americans lack the financial resources to pay for extended nursing home care or assisted living, even if they were to combine their median income and household value of financial assets.

The financial challenges faced by current retirees may be just the tip of the iceberg. The study raises important questions about the economic stability of future generations of older adults. With fewer young adults owning property compared to the baby boomer generation at their age, it's unclear how property ownership will transition in the coming decades and how this will impact the ability to absorb financial shocks for future retirees.

This generational shift in property ownership, combined with the ongoing challenges of saving for retirement and the rising costs of health care and long-term care, suggests that future retirees may face even greater financial insecurity than current older adults.

As we've explored the financial challenges facing older Americans, it's clear that many are vulnerable to financial shocks that can derail their retirement plans. One potential solution to mitigate this risk is the strategic use of annuities as part of a comprehensive retirement income strategy. Annuities can serve as a powerful tool to decrease the impact of and exposure to financial shocks in several ways that include:

• Providing a guaranteed income stream. One of the primary benefits of annuities is their ability to provide a guaranteed income stream for life, regardless of market conditions or how long a retiree lives. This guaranteed income can act as a buffer against financial shocks by ensuring that essential expenses are covered, even if other assets are depleted or market conditions are unfavorable.
• Hedging against sequence of returns risk. Sequence of returns risk refers to the danger of experiencing poor investment returns in the early years of retirement, which can have a devastating impact on a portfolio's longevity. Annuities can help hedge against this risk by providing a stable income stream that is not dependent on market performance. This allows retirees to avoid making withdrawals from their investment portfolio during market downturns, giving their assets time to recover.
• Protecting against longevity risk. One of the most significant financial shocks retirees face is simply living longer than expected and outliving their savings. Annuities, particularly lifetime annuities, provide insurance against this risk by guaranteeing income for as long as the annuitant lives. This can provide peace of mind and allow retirees to spend more confidently in the early years of retirement, knowing they have a safety net in place.
• Preserving assets. Contrary to the common misconception that annuities deplete assets, research suggests that annuities can actually help preserve wealth over the long term. A study by the Employee Benefit Research Institute found that after 18 years of retirement, the non-housing assets of pensioners (who essentially have an annuity through their pension) dropped by only 4%, compared to a 34% drop for those without a pension.
• Providing stability during market fluctuations. Fixed annuities, in particular, can provide a stable foundation in a retirement portfolio. The value of a fixed annuity is guaranteed to increase every day, protecting savings as retirement approaches and providing a reliable income source during market downturns.
• Offering tax advantages. Annuities can provide tax benefits that may help mitigate the impact of financial shocks. Contributions to annuities grow tax-deferred, which can lead to greater growth potential through compounding. Additionally, when funds are withdrawn in retirement, retirees may be in a lower tax bracket, potentially reducing their overall tax burden.

The NCOA and LeadingAge LTSS Center study reveals that 80% of older Americans face significant financial vulnerability. The data reveal concerning trends: declining assets across most households, rising long-term care costs and limitations of home equity as a safety net. While annuities offer one potential solution by providing guaranteed income and protection against various retirement risks, they represent just one piece of a complex puzzle.

The findings underscore an urgent need for both individual action and policy changes to improve retirement security. Future retirees may face even greater challenges due to declining property ownership and rising health care costs.