Financial Security In Retirement Comes With A High Price Tag

It takes a lot of money to be financially secure in old age. Federal Reserve data suggests that to be financially secure in retirement, people will likely need more than $500,000 in savings. In assessing how retirees are faring, it is important to go beyond simply asking people how they are feeling about their situation and look under the hood at objective measures of well-being.

The Federal Reserve’s Survey of Household Economics and Decisionmaking (SHED) is designed to capture various aspects of people’s financial security. The SHED asks people how they feel about their financial situation and large numbers of retirees report they are either “financially comfortable” or “doing ok financially.” The problem is this is a subjective (and not too accurate) way to get at the question of people’s actual financial well-being in retirement. And while there is no single, universal definition of financial security, a more objective and reasonable approach would start from the idea that financially secure adults have no trouble paying their bills on a regular basis. That is, they had no difficulties paying their bills in the recent past, face no problems paying their bills right now and will be able to handle small emergencies in the future, if they arise. Fortunately, the SHED includes indicators of trouble paying bills in the recent past including credit card balances, medical debt and a reliance on predatory sources of financing such as pawn shops and payday lenders. In addition, it asks whether people have skipped health care because of the costs in the past twelve months. As to current difficulties, the SHED survey specifically asks about people’s ability to pay all of their bills over the past twelve months. Finally, the SHED asks a series of questions about people’s ability to pay for small emergencies such as whether people are able to cover a $400 emergency with cash or savings. A financially secure retiree can be defined as one who has no credit card balances, no medical debt and no recent use of predatory financing, can pay all of their bills and can manage a $400 emergency. To be clear, this definition leaves out some aspects of financial security such as whether people can afford to repair their house, but it likely is a good approximation of what people need to be financially secure in retirement.