Do You Get Your Money’s Worth From Buying An Annuity?

Coin Stacks And Chart Graphs On A Chessboard

Once upon a time, in the (somewhat mythical) past of traditional defined benefit pensions, your employer protected you from the risk of outliving your money in retirement, by acting, more or less, as an insurance company providing an annuity. With that benefit receding into the past, many experts have been hoping that Americans with 401(k) plans would avail themselves of annuities on their own, to give themselves the same sort of protection, and, indeed, the SECURE Act of 2019 made it easier for those plans to offer their participants an annuity choice, and, when surveyed, 73% of those participants said they would “consider” an annuity at retirement.

At the same time, though, Americans distrust annuities — in part because traditional deferred annuities had high fees and expenses and only made sense in an era predating IRAs and 401(k)s, when they were attractive solely due to the limited tax-advantaged options for retirement savings. But that’s not the only reason — annuities, quite frankly, aren’t cheap.

How do you quantify the value of an annuity? In one respect, it’s subjective and personal: do you judge yourself to be in good health, or does family history and your list of medications say that you’ll be one of those with the early deaths that longer-lived annuity-purchasers are counting on? Do you want to be sure you can maintain your standard of living throughout your retirement, or do you figure that you won’t really care one way or another if you have to cut down expenses once you’re among the “old-old”?

But measuring the value of annuities, generally speaking, does tell us whether consumers are getting a fair deal from their purchases, and here, a recent working paper by two economists, James Poterba and Adam Solomon, “Discount Rates, Mortality Projections, and Money’s Worth Calculations for US Individual Annuities,” lends some insight.

Here’s some good news: using the costs of actual annuities available for consumers to purchase in June 2020, and comparing them to bond rates which were similar to the investment portfolios those insurance companies hold, the authors calculated “money’s worth ratios” that show that, for annuities purchased immediately at retirement, the value of the annuities was between 92% – 94% (give-or-take, depending on type) of its cost. That means that the value of the insurance protection is a comparatively modest 6 – 8% of the total investment.

But there’s a catch — or, rather, two of them.

In the first place, the authors calculate their ratios based on a standard mortality table for annuity purchasers — which makes sense if the goal is to judge the “fairness” of an annuity for the healthy retirees most likely to purchase one. But this doesn’t tell us whether an annuity is a smart purchase for someone who thinks of themselves as being in comparatively poorer health, or with a spottier family health history, and folks in these categories would benefit considerably from analysis that’s targeted at them, that evaluates, realistically, whether annuities are the right call and whether their prediction of their life expectancy is likely to be right or wrong.

In the second place, the 92% – 94% money’s worth calculation is based on the typical investment portfolio of insurance companies, approximated by the returns of BBB-rated bonds. This measures whether the annuity is “fair” or not, in that “moral” sense of whether the perception that the company is “cheating” is customers is real (it’s not).

But these interest rates are very low. The authors, in addition to their calculations of “money’s worth,” back into the implied discount rate from the annuity costs themselves. For men aged 65, that interest rate is 2.16%; for women aged 65, 2.18%.

Now, imagine that you compare this annuity to an alternative plan of investing your money in the stock market, earning 7% annual returns, and believing you can predict your death date (or not really caring if you fall short or end up with leftover money for heirs).

The cost of the protection offered by the annuity, the guarantee that you will never run out of money, and that you will not suffer from a market crash, is very expensive indeed — when you compare apples to oranges in this manner, the money’s worth ratio is, according to my very rough estimates, more like 60%, meaning that about 40% of your cash is spent to purchase the “insurance protection” of the annuity.

And, again, that’s not because insurance companies are cheating anyone; that’s solely because of the wide gap between corporate bond rates and expected returns when investing in the stock market— a gap which was particularly wide in the summer of 2020 when this study was competed, but remains nearly as wide now.

As it stands, Moody’s Baa rates are in the 3% range; in the 2000s, they were in the 6% range, and in the 1990s, from 7% – 9%. Although this drop in bond rates is good news for American homebuyers because this marches in tandem with mortgage rates, it makes it far harder for retirees to manage their finances in ways that protect them from the risks that they face in their retirement.

Perhaps interest rates in general, and bond rates specifically, will increase as we leave our current economic challenges, but there’s no certainty, and as long as this gap between bond rates and expected stock market returns remains so substantial, retirees will be challenged to find any sort of safe investment that makes sense for them. Which means that what seems like a great benefit for Americans looking to borrow money — for mortgages, car loans, credit cards — can pit the elderly against the young in a generational “us vs. them” contest.

As always, you’re invited to comment at JaneTheActuary.com!

Follow me on Twitter. Check out my website.

Yes, I’m a nerd, and an actuary to boot. Armed with an M.A. in medieval history and the F.S.A. actuarial credential, with 20 years of experience at a major benefits consulting firm, and having blogged as “Jane the Actuary” since 2013, I enjoy reading and writing about retirement issues, including retirement income adequacy, reform proposals and international comparisons.

Source: Do You Get Your Money’s Worth From Buying An Annuity?

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Critics:

An annuity is a series of payments made at equal intervals.[1] Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments. Annuities can be classified by the frequency of payment dates. The payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other regular interval of time. Annuities may be calculated by mathematical functions known as “annuity functions”.

An annuity which provides for payments for the remainder of a person’s lifetime is a life annuity.

Variability of payments

  • Fixed annuities – These are annuities with fixed payments. If provided by an insurance company, the company guarantees a fixed return on the initial investment. Fixed annuities are not regulated by the Securities and Exchange Commission.
  • Variable annuities – Registered products that are regulated by the SEC in the United States of America. They allow direct investment into various funds that are specially created for Variable annuities. Typically, the insurance company guarantees a certain death benefit or lifetime withdrawal benefits.
  • Equity-indexed annuities – Annuities with payments linked to an index. Typically, the minimum payment will be 0% and the maximum will be predetermined. The performance of an index determines whether the minimum, the maximum or something in between is credited to the customer.

See also

References

  • Kellison, Stephen G. (1970). The Theory of Interest. Homewood, Illinois: Richard D. Irwin, Inc. p. 45
  • Lasher, William (2008). Practical financial management. Mason, Ohio: Thomson South-Western. p. 230. ISBN 0-324-42262-8..
  1. Jordan, Bradford D.; Ross, Stephen David; Westerfield, Randolph (2000). Fundamentals of corporate finance. Boston: Irwin/McGraw-Hill. p. 175. ISBN 0-07-231289-0.
  • Samuel A. Broverman (2010). Mathematics of Investment and Credit, 5th Edition. ACTEX Academic Series. ACTEX Publications. ISBN 978-1-56698-767-7.
  • Stephen Kellison (2008). Theory of Interest, 3rd Edition. McGraw-Hill/Irwin. ISBN 978-0-07-338244-9.

Why You May Be Overly Optimistic About Your Social Security Benefits

Frank and Joan Shortland

As humans, we tend to be overoptimistic on everything from our driving ability to investment prowess. It’s perennial problem when it comes to money and retirement management.

A recent study found that people routinely over-estimate their Social Security benefits. Two researchers from the University of Michigan found that “Americans face the challenges of retirement with varying degrees of preparation. Evidence indicates that that many individuals may not be making the best possible choices with respect to their Social Security and retirement savings.”

Why do people expect more than what they actually receive in benefits? Here’s what the researchers found:

  • Most retirees find that the amount of Social Security retirement benefits they receive is lower than what they had expected before claiming.
  • Not appropriately adjusting for early or delayed claiming could contribute to expectation biases about retirement benefits. In particular, this would be most relevant for those with lower levels of education.
  • Current workers recognize that they do not have a good idea of what their future retirement benefits will be. Forty-nine percent of our survey respondents declare having no knowledge about their benefit amount.
  • The average expectation bias for monthly retirement benefits in our sample is $307, which equals 27% of the average forecasted benefit for this sample (in current dollars).
  • Men display lower expectation bias and are less likely to overestimate their retirement benefits.

How to avoid these misconceptions? You need to estimate benefits based on the age you intend to claim them and your earnings record. A good place to start is Social Security’s benefits estimator tool.

Since people are living longer and are generally healthier in older age, the Social Security Administration raised the full retirement age to 67 for people born in 1960 or later, up from 65. You can apply for benefits as early at 62, although your benefit would be reduced by 30%. On the other hand, if you can wait until age 70, you will get 124% of the monthly benefit because you delayed getting benefits for 36 months.

Consider how each scenario might impact your retirement planning. Preparing for different outcomes now is the best way to help protect your savings – and peace of mind – down the line.

Planning today can make a big difference in your retirement lifestyle tomorrow. Once you leave the workforce, the years that follow can be all that you want them to be—if you pave the way with a comprehensive financial plan that includes your Social Security income.

Your plan should be based on what you know today and flexible enough to adapt to any changes—like unforeseen personal circumstances or developments that come out of Washington.

Social Security can be a valuable tool to help bridge any gap you may have between your expected sources of income and your expenses.

POINTS TO KNOW

  • Social Security has features for retirees that other retirement savings plans don’t have.
  • When creating your retirement plan, be sure to include your Social Security benefits as an income source.
  • It’s important to have a retirement budget: Itemize your income sources and expected expenses.

Follow me on Twitter or LinkedIn. Check out my website or some of my other work here.

 

Source: Why You May Be Overly Optimistic About Your Social Security Benefits

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Citations: 

 1, 5, 7, 8 AARP: “How is Social Security funded?” February 11, 2021 https://www.aarp.org/retirement/social-security/questions-answers/how-is-social-security-funded/

2 SSA: “Your Retirement Benefit: How It’s Figured” by Social Security Agency, January 2021 https://www.ssa.gov/pubs/EN-05-10070.pdf

3 SocialSecurity.gov: “My Account” information collected from www.socialsecurity.gov/myaccount

4 AARP: “How much longer will Social Security be around?” September 22, 2020 https://www.aarp.org/retirement/social-security/questions-answers/how-much-longer-will-social-security-be-around/

6 Statista: “Number of retired workers receiving Social Security in the United States from 2010 to 2020” by Statista Research Department, January 19, 2021 https://www.statista.com/statistics/194295/number-of-us-retired-workers-who-receive-social-security/

9 SSA: “Retirement Benefits: Retirement Age Calculator” by Social Security Agency https://www.ssa.gov/benefits/retirement/planner/ageincrease.html

10 SSA: “Retirement Benefits: Starting Your Retirement Benefits Early” by Social Security Agency https://www.ssa.gov/benefits/retirement/planner/agereduction.html

11 SSA: “Retirement Benefits: How Delayed Retirement Affects Your Social Security Benefits” by Social Security Agency https://www.ssa.gov/benefits/retirement/planner/1960-delay.html

12 IRS.gov: “Are Social Security Benefits Taxable?” February 13, 2017 https://www.irs.gov/newsroom/are-social-security-benefits-taxable

13, 14 SSA: “Retirement Benefits: Income Taxes And Your Social Security Benefit” by Social Security Agency https://www.ssa.gov/benefits/retirement/planner/taxes.html 

15 Investopedia: “Do Earnings from a Roth IRA Count Toward Income?” By Denise Appleby, April 8, 2021 https://www.investopedia.com/ask/answers/05/iraearningsmagi.asp

If You’re In Your 50s or 60s, Consider These Moves To Avoid Higher Taxes In Retirement

If you are working with an eye toward retirement or even semi-retirement, you are probably (hopefully) saving more than you could in the past in your retirement accounts. You may have paid off the mortgage and paid for college and other heavy expenses of raising children. That all sounds like you are on your way, except for one big problem I call the “ticking tax time bomb.”

I’m referring to the tax debt building up in your individual retirement account, 401(k) or other retirement savings plans. And, as I wrote in my newest book, “The New Retirement Savings Time Bomb,” it can quickly deplete the very savings you were relying on for your retirement years. But there are a few ways you can avoid this problem.

While you may be watching your savings balances grow from your continuing contributions and the rising stock market, a good chunk of that growth will go to Uncle Sam. That’s because most, if not all, of those retirement savings are tax-deferred, not tax-free.

The funds in most IRAs are pretax funds, meaning they have not yet been taxed. But they will be, when you reach in to spend them in retirement. That’s when you quickly realize how much of your savings you get to keep and how much will go to the government.

The amount going to the Internal Revenue Service will be based on what future tax rates are. And given our national debt and deficit levels, those tax rates could skyrocket, leaving you with less than you had planned on, just when you’ll need the money most.

So, that’s the dire warning. But you can change this potential outcome with proper planning and making changes in the way you save for retirement going forward.

You can begin by taking steps to pay down that tax debt at today’s low tax rates and begin building your retirement savings in tax-free vehicles like Roth IRAs or even permanent life insurance which can include cash value that builds and can be withdrawn tax-free in retirement.

In addition, if you are still working, you can change the way you are saving in your retirement plans. If you have a 401(k) at work, you could make contributions in a Roth 401(k) if the plan offers that. A Roth 401(k) lets your retirement savings grow 100% tax-free for the rest of your life and even pass to your beneficiaries tax-free too.

Learn more: All about the Roth IRA

What the News Means for You and Your Money

Understand how today’s business practices, market dynamics, tax policies and more impact you with real-time news and analysis from MarketWatch.

For 2021, you can contribute up to $26,000 (the standard $19,500 contribution limit plus a $6,500 catch-up contribution for people 50 and older). With some Roth 401(k) workplace plans, you might be able to put in even more.

Then, see if you can convert some of your existing 401(k) funds either to your Roth 401(k) or to a Roth IRA. Once you do this, you will owe taxes on the amount you convert. The conversion is permanent, so make sure you only convert what you can afford to pay tax on.

Also read: We have $1.6 million but most is locked in our 401(k) plans — how can we retire early without paying so much in taxes?

Don’t let the upfront tax bill deter you from moving your retirement funds from accounts that are forever taxed to accounts that are never taxed.

Similarly, you can convert your existing IRAs to Roth IRAs, lowering the tax debt on those funds as well. The point is to not be shortsighted and avoid doing this because you don’t want to pay the taxes now. That tax will have to be paid at some point, and likely at much higher future tax rates and on a larger account balance.

It’s best to get this process going now, maybe even with a plan to convert your 401(k) or IRA funds to Roth accounts over several years, converting small amounts each year to manage the tax bill.

If you have been contributing to a traditional IRA, stop making those contributions and instead start contributing to a Roth IRA. Anyone 50 or over can put in up to $7,000 a year ($6,000 plus a $1,000 catch-up contribution) and you can do so for a spouse even if that spouse is not working.

If one of you has enough earnings from a job or self-employment (and you don’t exceed the Roth IRA contribution income limits), each of you can contribute $7,000, totaling $14,000 in Roth IRA contributions each year. That will not only add up quickly, it will add up all in your favor because now you are accumulating retirement savings tax-free.

Related: Should you convert your IRA to a Roth if Biden’s infrastructure plan passes?

Once the funds are in a Roth IRA or other tax-free vehicles (like life insurance), those funds compound tax-free for you.

The secret is to pay taxes now. It’s so simple, but also so counterintuitive that most people don’t take advantage of this and end up paying heavy taxes in retirement that could have all been avoided.

Ed Slott is a Certified Public Accountant, an individual retirement account (IRA) distribution expert and author of “The New Retirement Savings Tax Bomb.” He is president and founder of Ed Slott and Company, providing advice and analysis about IRAs.

This article is reprinted by permission from NextAvenue.org, © 2021 Twin Cities Public Television, Inc. All rights reserved.

Source: If you’re in your 50s or 60s, consider these moves to avoid higher taxes in retirement – MarketWatch

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More from Next Avenue:

Is a Roth IRA Right for You?

401(k) Early Withdrawals Have Become Easier: Be Careful!

Tips for Couples to Manage Their 401(k) Plans

I’m 49, my wife is 34, we have 4 kids and $2.3 million saved. I earn $300K a year but ‘lose a lot of sleep worrying about tomorrow’ — when can I retire?

‘Retirement? How?’ I’m 65, have nothing saved and am coming out of bankruptcy.

Got your COVID-19 vaccine? Now roll up your sleeve to protect yourself against these other diseases

Your 401(k) fees could cost you half a million dollars in retirement

Delaying Required IRA Distributions Again Would Largely Help Only The Wealthy

Senior couple on a sailing cruise.

The House Ways & Means Committee is once again tinkering with the law that requires retirees to take minimum distributions from their individual retirement accounts (IRAs) and 401(k)s. Each time, Congress eases the required minimum distribution (RMD) rules at great cost to the federal government. Yet the beneficiaries would overwhelmingly be wealthy retirees and their future heirs.

The committee bill, approved today, would make two big changes to RMDs. It would allow retirees to wait until age 75 before taking required minimum annual distributions and paying tax on them. Currently, they must begin taking distributions at age 72. And it would make it easier for older adults to avoid taking required distributions by investing their retirement funds in annuities.

The new RMD rules are included in the Securing a Strong Retirement (SECURE) Act of 2021. To be sure,  the measure would make some beneficial changes, including provisions that encourage more employers to auto-enroll workers in retirement plans, an important tool to encourage participation. But it also includes some clunkers, and the RMD rules are high on the list.

Fiddling

Congress can’t help fiddling with the RMD rules.

In December, 2019, Congress allowed workers to delay taking RMDs from age 70.5 to age 72. Last year, Congress waived minimum distributions entirely in response, it said, to the pandemic. Lawmakers felt it would not be fair to require retirees to take distributions after the stock market plunged in March, 2020. Except, whoops, the S&P index rose 16 percent for the year.

Now SECURE would gradually extend the delay to 75. It would rise to 73 in 2022, then 74 in 2029, and finally 75 in 2032. But don’t be surprised if a future Congress accelerates the timetable.

Remember, the purpose of tax-free retirement plans is to help older adults save for their, um, retirement. It was not supposed to be another tool for bequests to family members. RMD rules are intended to make sure that these assets are taxed during a person’s expected life. Without the rules, rich retirees could simply stash assets in tax-advantage accounts until they die, then pass them on to heirs.

Not cheap

Delaying RMDs again would have major consequences, some unintended.  And it would not be cheap. At a time when lawmakers say they are worried about growing deficits, delaying RMDs would reduce federal revenue by almost $7 billion over 10 years. But the real cost would begin once the age phases up to 74 in 2029. At that point, revenue would fall by about $1.4 billion annually.

But its biggest problem is that delaying RMDs would be so regressive.

In 2015, the roughly 17 percent of taxpayers with adjusted gross incomes of $100,000-plus took more than half of the $253 billion in IRA distributions. Those making $50,000 or less took only about 20 percent.

In 2019, the median retirement account balance was only about $65,000, according to the latest Federal Reserve’s Survey of Consumer Finances. Another survey found that nearly one-third of people in their 60s or older had less than $100,000 in defined contribution plan assets.

No help to many

Many low-income retirees with such limited retirement assets already take more than the required minimum annually to pay routine bills. Delaying required distributions would not benefit them in any way.

Keep in mind, as well, the life expectancy for low income people is far lower than for the wealthy. The RMD delay also is of no benefit for those who die before age 73.

It is the same story with enhanced annuities. Retirees with relatively little wealth receive few benefits from these investment. Someone investing that median $65,000 at age 65 would get an average payout of only about $250 a month.

Unintended losers

Charities may be unintended losers from these changes. They benefit from another complicated provision called qualified charitable distributions (QCDs). By contributing required distributions to charity, seniors can avoid tax on mandatory withdrawals. And QCDs have become a popular way for wealthy seniors to donate to charity.

It appears that these gifts fell sharply in 2020, largely in response to the temporary waiver of RMDs. And it would be no surprise if they continue to fall if wealthy seniors can delay distributions until age 75.

Some heirs are required to close, and pay tax on, their inherited IRAs within 10 years, although spouses and minor children and exempt from that requirement. Even for those subject the 10-year rule, the long deferral can be extremely valuable.

The Biden Administration is proposing a major shift in the tax treatment of assets held outside of retirement accounts by taxing at death unrealized capital gains in excess of $1 million. By doing so, it would prevent wealthy people from passing on a large share of their wealth tax free.

The RMD change in the SECURE Act, by contrast, would make it easier for wealthy seniors to pass on retirement plan assets, with any tax liability delayed for years.

I am author of the book “Caring for Our Parents” and senior fellow at The Urban Institute, where I am affiliated with the Tax Policy Center and the Program on Retirement Policy. I also write a tax and budget policy blog, TaxVox, which you may read at Forbes.com or at http://taxvox.taxpolicycenter.org/ Before joining Urban, I was a senior correspondent in the Washington bureau of Business Week.

Source: Delaying Required IRA Distributions—Again— Would Largely Help Only The Wealthy

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For more information on IRAs, including required withdrawals, see:

These frequently asked questions and answers provide general information and should not be cited as legal authority.

  1. What are Required Minimum Distributions?
  2. What types of retirement plans require minimum distributions?
  3. When must I receive my required minimum distribution from my IRA?
  4. How is the amount of the required minimum distribution calculated?
  5. Can an account owner just take a RMD from one account instead of separately from each account?
  6. Who calculates the amount of the RMD?
  7. Can an account owner withdraw more than the RMD?
  8. What happens if a person does not take a RMD by the required deadline?
  9. Can the penalty for not taking the full RMD be waived?
  10. Can a distribution in excess of the RMD for one year be applied to the RMD for a future year?
  11. How are RMDs taxed?
  12. Can RMD amounts be rolled over into another tax-deferred account?
  13. Is an employer required to make plan contributions for an employee who has turned 70½ and is receiving required minimum distributions?
  14. What are the required minimum distribution requirements for pre-1987 contributions to a 403(b) plan?

How is the amount of the required minimum distribution calculated?

Generally, a RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Choose the life expectancy table to use based on your situation.

See the worksheets to calculate required minimum distributions and the FAQ below for different rules that may apply to 403(b) plans.

The Economics of Aging and the Frailty Index

photograph of a younger female nurse sitting with an older female patient as her vitals are read

Measuring health is important for many reasons. It can help doctors and scientists understand the risk of medical problems and develop prevention strategies that can improve patient care. Monitoring health status can also help economists understand financial outcomes and help policymakers identify the likelihood of people needing caregiver assistance or retiring early, life events that can have implications for programs such as Social Security, Medicare, and Medicaid.  Further, measuring health is essential for assessing the return on U.S. health care spending which is large—close to one fifth of U.S. gross domestic product—and growing.

In the United States, people usually take surveys that allow assessment of physical well-being. Self-assessments of health can help forecast life expectancy and functional ability, and whether a person may require medical care at some point in the future. However, in some cases, a better measure of health than self-assessments might be necessary.

Enter the frailty index

In June 2019, the Atlanta Fed published a working paper cowritten by Karen Kopecky, a Federal Reserve Bank of Atlanta research economist and associate adviser. Kopecky and her coauthors discussed the frailty index, an alternative method of evaluating health. This measure, pioneered by researchers at Dalhousie University in Halifax, Nova Scotia, focuses on the total number of health ailments a person has and the nature of those problems.

Kopecky worked with researchers Roozbeh Hosseini, a visiting scholar at the Atlanta Fed who is also an assistant professor at the University of Georgia, and Kai Zhao, associate economics professor at the University of Connecticut, to create frailty indexes using three surveys of Americans that include a host of questions on various aspects of health conditions.

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In this edition of Aging Matters, Nashville Public Television examines the costs and financial impact of aging and hears from people navigating financial decisions now. Have we saved and planned enough so our finances will last as long as we do? The average person turning 65 this year will live to be 85 years old. But one in five will live to be 90. One in ten will live to be 95. Will we be able to afford the quality of life we want? The future is always uncertain, but what is important is that we take time to look ahead, discuss and prepare for the economics of aging.
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A key finding of the researchers’ work was that the proportion of individuals in the U.S. population in good health decreases faster as people age when well-being is measured with the frailty index rather than with individual self-assessments. “For this reason the frailty index is an especially good measure for studying how health evolves with age,” Kopecky said.

The architecture of the frailty index helps explain why it can be a better predictor of health during aging. The index combines information from a range of questions about an individual’s specific health ailments to provide a summary of the person’s overall well-being. Kopecky and her colleagues used 27 health variables to construct a frailty index for a sample of more than 18,500 Americans who responded to the Panel Study of Income Dynamics (PSID) from 2003 to 2015.

The survey includes questions on specific medical conditions and activities of daily living. The variables the researchers looked at include difficulty with activities such as eating, dressing, walking, managing money, and getting in and out of bed, as well as the presence of conditions including cancer, diabetes, heart attack, stroke, and loss of memory.

The researchers derived the index by adding the total number of variables reported as ailments by an individual, then dividing that sum by the total amount of variables observed for that person overall in the year. The index captured expected variation in health: frailty was higher in older age groups compared with younger ones. Further, the sample showed that increases in frailty over time were three times more common than decreases.

Kopecky and her coauthors also compared the state of health over time using the frailty index with self-reported health status by making calculations based on the percentage of respondents in the PSID survey who self-reported their health as “excellent,” “very good,” “good,” “fair,” or “poor.” Their analysis found that when health is measured by frailty, the proportion of individuals with excellent or very good health declines faster with age.

They set cutoff values for frailty based on the distribution of self-reported health of 25- to 29-year-olds. When the cutoff values and frailty were used to determine individuals’ health categories as opposed to self-reported health, the researchers observed that health deteriorated much more rapidly with age.

In other words, the analysis showed that the fraction of people with poor self-reported health status rose with age, but when they measured health by frailty, they observed a much faster rise than with the self-reports (see the charts). For example, only 17 percent of people aged 70 to 74 had a frailty index low enough to fall into the “excellent” or “very good” health category. That compares with 39 percent of 70- to 74-year-olds who self-reported their health as “excellent” or “very good.”

“We interpret these patterns as evidence that self-reported health status underestimates the decline in observable health,” the paper says. The researchers also found that the frailty index was a better predictor than self-reported health of mortality and the probability that a person would enter a nursing home or become dependent on Social Security Disability Insurance.

Individuals’ self-assessments not always reliable

One reason frailty may be a better gauge of health than self-assessments has to do with the subjective nature of individuals’ judgments of their well-being, Kopecky said. “People tend to compare themselves to others their age” in self-reporting their health condition rather than considering how their present medical status compares with their past state, she said. “People seem to be readjusting their self-reported health. So if you really want to map out how health evolves as people age, subjective measures don’t work well.”

That isn’t to say that self-reported health information doesn’t have value. It can play a role in helping researchers understand the variation of health within an age group, Kopecky said. She added that self-reported data can also help uncover private medical information that a frailty index would not easily discern, such as hereditary conditions that may put individuals at risk for certain diseases.

Frailty measures gaining traction

Frailty measures as a tool to gauge health are growing in use. Dalhousie University notes that they have been used in studies such as the American National Health and Nutrition Examination Survey, the Beijing Longitudinal Study of Aging, and the Survey of Health, Ageing and Retirement in Europe.

Kopecky said the frailty index model holds much potential in economics. It can provide insight into such matters as the effect of health on a person’s earnings over time, a country’s labor supply, and individual consumption patterns. “It’s a step in the right direction in terms of improving our way of measuring health and as a result being able to understand how health interacts with economic variables and models,” she said.

photo of Karen Jacobs

Staff writer for Economy Matters

 

Source: The Economics of Aging and the Frailty Index – Federal Reserve Bank of Atlanta

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1
CROss-National Online Survey (CRONOS) Panel | European Social Survey (ESS)
[…] Fabra Eric Balster at CentERdata Annette Scherpenzeel and Julie Korbmacher at the Munich Center for the Economics of Aging […]
N/A
AMDA On-The-Go | SNFs in the post-COVID World
paltc.podbean.com – April 10
[…] His research examines the economics of aging with a particular interest in the areas of long-term care and post-acute care […]
N/A
John PHILLIPS
[…]   John’s current portfolio at NIA focuses on the economics of aging and the development of international comparators to the US Health and Retirement Study to suppor […]
0
Opinion: A powerful way to keep retirees out of poverty is to tackle this workplace problem (and it has nothing to do with retirement accounts)
[…] The economics of aging is forcing many older Americans to work beyond traditional retirement age […]
N/A
A conversation with ‘superhero’ health policy researcher David Grabowski – The World According to Dr. El
[…] Grabowski has studied the economics of aging for decades and, due in large part to the pandemic-related attention thrust upon long-term care […]
N/A
Gender Differences in Financial Advice by Tabea Bucher-Koenen, Andreas Hackethal, Johannes Koenen, Christine Laudenbach :: SSRN
papers.ssrn.com – March 29
[…] Economic Research; Max Planck Society for the Advancement of the Sciences – Munich Center for the Economics of Aging (MEA) Andreas Hackethal Goethe University Frankfurt – Faculty of Economics and Busines […]
N/A
Speakers – MGS Conference
mgsconference.org – March 26
[…] Her research area is in the economics of aging– investigating how structural discrimination and racial inequities shape the experiences and health […]
N/A
The Survey of Health, Ageing and Retirement in Europe (SHARE): Influence of the COVID-19 pandemic on private care networks in Europe
[…] A new study by Bergmann & Wagner from the Munich Center for the Economics of Aging (MEA) focuses on how the pandemic influences the situation of informal care across Europe durin […] Munich: Munich Center for the Economics of Aging (MEA) […]
0
The Division of Behavioral and Social Research (BSR) of the (NIA) is hiring!
[…] Successful candidates will also initiate research in other areas of the economics of aging including how economic factors (e […]
N/A
Newton City Council approves $4.2 million grant toward renovating Coleman House – The Boston Globe
[…] Advertisement “The economics of aging is pretty bleak,” Heyer said […]
1
Post-doctoral Researcher (m/f/div) in Economics – Max Planck Institute for Social Law and Social Policy, Munich
[…] As a candidate, you will have expertise or an interest in the economics of aging and complement the research interests and skills of other members of the unit […] – and willingness to collaborate with other members of the research unit – on projects related to the economics of aging (see below); Strong knowledge of economic theory, econometrics and/or expertise in structura […]
1
Who Shall Live?
[…] This second expanded edition also includes recent papers by Fuchs on the economics of aging, the socio-economic correlates of health, the future of health economics, and his polic […] to Woodcock: The “Irrational” Pursuit of National Health Insurance (133 KB) “Provide, Provide”: The Economics of Aging (122 KB) The Dedicated VAT Solution (99 KB) Request Inspection Copy Contents: Health and Economic […] Thoughts on Health Economics and Health Policy: The Future of Health Economics “Provide, Provide”: The Economics of Aging Reflections on the Socio-Economic Correlates of Health A Comprehensive Cure: Universal Health Car […]
0
Life-histories in Finland
[…] Munich: Munich Center for the Economics of Aging […] Mannheim: Munich Center for the Economics of Aging […]
0
Life-histories in Finland
[…] Munich: Munich Center for the Economics of Aging […] Mannheim: Munich Center for the Economics of Aging […]
0
Post-doctoral Researcher in applied Economics (m/f/div) [Nr. 05-21] | Max-Planck-Institut für Sozialrecht und Sozialpolitik – MPISOC
[…] As a candidate, you will have expertise or an interest in the economics of aging and complement the research interests and skills of other members of the unit […] – and willingness to collaborate with other members of the research unit – on projects related to the economics of aging (see below) Strong knowledge of econometrics and/or expertise in structural estimation are an asset […]
N/A
Growth and Globalization after the Pandemic | Events | HKUST Institute for Emerging Market Studies
iems.ust.hk – March 3
[…] on firm performance, poverty and inequality, migration and employment, health and education, and the economics of aging in China […]
3
What drives different treatment choices? Investigation of hospital ownership, system membership and competition | Health Economics Review | Full Text
healtheconomicsreview.biomedcentral.com – February 25
[…] In: Analyses in the Economics of Aging […]
N/A
Harvard Public Policy Professor Dr. David Grabowski on COV19 in Nursing Homes on Seniors Straight Talk | Feb 24, 2021 – ReleaseWire
http://www.sbwire.com – February 24
[…] His research examines the economics of aging with a particular focus in the areas of long-term care and post-acute care […]
N/A
Population Aging as a Global Issue
oxfordre.com – February 20
[…] ), Developments in the economics of aging (pp […]
N/A
K. N. Raj Library: Titles on display from 12-02-2021 to 19-02-2021 «
knrajlibrary.wordpress.com – February 19
[…] Themes in the economics of aging […]
1
Research Scientist | Population Europe
population-europe.eu – February 6
Study and Career Research Scientist The ‘Munich Center for the Economics of Aging’ (MEA) at the Max Planck Institute for Social Law and Social Policy offers one full-time positio […]
N/A
Student Research Assistant (30-40h/month) [Nr. 03-21] | Max-Planck-Institut für Sozialrecht und Sozialpolitik – MPISOC
http://www.mpisoc.mpg.de – February 5
[…] 03-21] The Munich Center for the Economics of Aging (MEA) is a department of the Max Planck Institute for Social Law and Social Policy, which conduct […]
0
Brigitte Madrian – Directory – BYU Marriott School of Business
marriottschool.byu.edu – February 3
[…] Volume 116, Pages 2-16, 2014 “Who Uses the Roth 401(k), and How Do They Use It?”, Discoveries in the Economics of Aging, Pages 411-440, National Bureau of Economic Research, Cambridge, MA, 2014 “Simplification an […] Volume 5, Pages 347-373, 2013 “The Availability and Utilization of 401(k) Loans”, Investigations in the Economics of Aging, Pages 145-72, University of Chicago Press, Chicago, IL, 2012 “$100 Bills on the sidewalk […] Employer Matching on Savings Plan Participation under Automatic Enrollment”, Research Findings in the Economics of Aging, Pages 311-327, University of Chicago Press, Chicago, IL, 2010 “The Regulation of Consume […]
0
Research Scientist (m/f/div) [Nr. 02-21] | Max-Planck-Institut für Sozialrecht und Sozialpolitik – MPISOC
[…] 02-21] The ‘Munich Center for the Economics of Aging’ (MEA) at the Max Planck Institute for Social Law and Social Policy offers one full-time positio […]
N/A
Visionary Biologist Says: Reversing Ageing Won’t Just Be for the Rich | Core Spirit
corespirit.com – December 24, 2020
[…] ” Then there are the economics of aging […]
N/A
Crwe World | Clearlake Portfolio Company Janus International to List on New York Stock Exchange through Business Combination with Juniper Industrial Holdings
crweworld.com – December 22, 2020
[…] – Best-in-class platform serves as the “one-stop-shop” to revitalize, enhance, and improve the economics of aging assets – Proven track record of strong, high-margin growth with an organic compounded annual growth […]
0
Clearlake Portfolio Company Janus International to List on New York Stock Exchange through Business Combination with Juniper Industrial Holdings
http://www.janusintl.com – December 22, 2020
[…] – Best-in-class platform serves as the “one-stop-shop” to revitalize, enhance, and improve the economics of aging assets   – Proven track record of strong, high-margin growth with an organic compounded annua […]
1
CLEARLAKE PORTFOLIO COMPANY JANUS INTERNATIONAL TO LIST ON NEW YORK STOCK EXCHANGE THROUGH BUSINESS COMBINATION WITH JUNIPER INDUSTRIAL HOLDINGS
clearlake.com – December 22, 2020
[…] Best-in-class platform serves as the “one-stop-shop” to revitalize, enhance, and improve the economics of aging assets   Proven track record of strong, high-margin growth with an organic compounded annual growth […]
N/A
Clearlake Portfolio Company Janus International to List on New York Stock Exchange through Business Combination with Juniper Industrial Holdings | Business Wire
http://www.businesswire.com – December 22, 2020
[…] – Best-in-class platform serves as the “one-stop-shop” to revitalize, enhance, and improve the economics of aging assets – Proven track record of strong, high-margin growth with an organic compounded annual growth […]
N/A
CREATE Appoints Four New Research Fellows – CREATE
create.usc.edu – December 19, 2020
[…] to future Alzheimer’s therapies, and is building a multidisciplinary research portfolio related to the economics of aging, access to innovation, health system preparedness, and resilience […]
0
Jakub Hlávka’s Christmas Greetings from Los Angeles / Česká centra – New York
new-york.czechcentres.cz – December 18, 2020
[…] He works in the intersection of the economics of aging, biotechnology innovation, and public-private partnerships across different sectors […]
5
Janus International to List on New York Stock Exchange • Radius+
radiusplus.com – December 18, 2020
[…] Best-in-class platform serves as the “one-stop-shop” to revitalize, enhance, and improve the economics of aging assets Proven track record of strong, high-margin growth with an organic compounded annual growt […]
1
Centre for Research on Aging
http://www.concordia.ca – December 12, 2020
[…] Aging; Community, Care and Connectivity; Health, Wellbeing and the Lifecourse; Politics, Policy and the Economics of Aging […]
0
Expression of Interest: Junior Assistant Professor in Economic Policy at the University of Padova
inomics.com – December 11, 2020
[…] Experience in the economics of aging, micro-econometrics, survey design and interdisciplinary research projects is also important […]
6
Expression of Interest: Junior Assistant Professor in Economic Policy | Department of Economics and Management “Marco Fanno” | Università di Padova
economia.unipd.it – December 9, 2020
[…] Experience in the economics of aging, micro-econometrics, survey design and interdisciplinary research projects is also important […]
0
Active Longevity Institute on LinkedIn: The Economics of Living to 100 – Wharton Magazine
http://www.linkedin.com – December 7, 2020
[…] Sharing an interesting article on the economics of aging from the last Wharton magazine, describing the means for financing longevity […]
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Kyall Walker on LinkedIn: The Economics of Living to 100 – Wharton Magazine
http://www.linkedin.com – December 6, 2020
[…] Sharing an interesting article on the economics of aging from the last Wharton magazine, describing the means for financing longevity […]
N/A
Xianhua (Emma) Zai
emmazai.github.io – December 6, 2020
[…] I am an applied microeconomist with interests in the economics of aging, education and health economics […]
0
A new vision for the Population Aging Research Center
penntoday.upenn.edu – December 3, 2020
[…] ” For Coe, who studies the economics of aging and has been a PARC member since she arrived at Penn in 2017, the expansion made perfect sense […]
2
Fourth edition of the Social Innovation Awards – Fundación MAPFRE
http://www.fundacionmapfre.org – November 30, 2020
[…] The economics of aging: Ageingnomics […]
33
Webinar Registration – Zoom
us02web.zoom.us – November 28, 2020
[…] His award-winning research examines the economics of aging with a particular interest in the areas of long-term care and post-acute care […]
2
Advancing Excellence in Long-Term Care Collaborative :: Virtual Summit on Mitigating Racial Inequities in Post-Acute & Long-Term Care
aeltcc.org – November 28, 2020
[…] His award-winning research examines the economics of aging with a particular interest in the areas of long-term care and post-acute care […]
1
Advancing Excellence in Long-Term Care Collaborative :: Virtual Summit on Mitigating Racial Inequities in Post-Acute & Long-Term Care
http://www.aeltcc.org – November 28, 2020
[…] His award-winning research examines the economics of aging with a particular interest in the areas of long-term care and post-acute care […]
4
The Medicare Part D open enrollment period: What you need to know
journalistsresource.org – November 19, 2020
[…] of medicine and public health sciences at the University of Rochester, whose research focuses on the economics of aging […]
N/A
Calls for Fellowship Applications
http://www.nber.org – November 19, 2020
[…] Fellowships are available for graduate students working on dissertations on the economics of aging, behavioral macroeconomics, energy economics, gender in the economy, health economics, and o […]
N/A
Social network type and subsequent cognitive health among older Europeans | International Psychogeriatrics
http://www.cambridge.org – November 7, 2020
[…] Mannheim: Mannheim Research Institute for the Economics of Aging (MEA) […]
N/A
Research
jrgoldstein.com – November 3, 2020
[…] Vogt, The Journal of the Economics of Aging, 2019 13:45-54 […]
N/A
Post-doctoral Researcher in applied Economics (m/f/d)
inomics.com – October 29, 2020
[…] – and willingness to collaborate with other members of the research unit – on projects related to the economics of aging (see below), Strong knowledge of econometrics and/or expertise in structural estimation ar […]
6
Aging-in-Place Home Modifications
agesafeamerica.com – October 8, 2020
The economics of aging-in-place home modifications are compelling, especially in comparison to the cost and trauma of […]
4
What Can Economics Say About Alzheimer’s Disease? – Harvard Business School Working Knowledge
hbswk.hbs.edu – September 28, 2020
[…] While there is overlap with the economics of aging, the defining features of the “economics of Alzheimer’s disease” is an emphasis on cognitiv […]
2
What can economics say about Alzheimer’s Disease?
http://www.aei.org – August 31, 2020
[…] While there is overlap with the economics of aging, the defining features of the ‘economics of Alzheimer’s Disease’ is an emphasis on cognitiv […]
4
The 38DL PLUS™ Ultrasonic Thickness Gauge Is an Asset to Asset Reliability Inspections | Blog Post | Olympus IMS
http://www.olympus-ims.com – August 22, 2020
[…] According to “The economics of aging infrastructure” article published in IEEE Power and Energy Magazine, an effective infrastructur […]
11
COVID-19, Technology, and Polarizing Jobs
aric.adb.org – August 1, 2020
[…] on firm performance, poverty and inequality, migration and employment, health and education, and the economics of aging in China […]
N/A
The Survey of Health, Ageing and Retirement in Europe (SHARE): Home
http://www.share-project.org – June 16, 2020
[…] at the Munich Center for the Economics of Aging (MEA), Max Planck Institute for Social Law and Social Policy […]
82
GBO NEWS: New Long-Term Care Database; Playing the COVID Nursing Home Card; Elder Despair and Suicide; 1991 Book’s “Crisis of 2020” Had Ageist Agenda; Pandemic in Cape Cod and Latinx LA; & More | Generations Beat Online
http://www.gbonews.org – June 11, 2020
[…] by Fay Lomax Cook and Elaine Weiss, The Hill (May 1, 2020): The writers, leading experts on the economics of aging, summarized  findings in a report they helped develop for the National Academy of Social Insurance […]
2
Retirement in Georgia: 3 reasons you might want to keep working
http://www.ajc.com – May 22, 2020
[…] ”Nicole Maestas, an associate professor of health care policy at Harvard Medical School who studies the economics of aging, health, and disability, told HHP you should continue working past age 65 if you can and want to […]
16
WEBINAR: The Economic Costs of the Pandemic: Catholic Social Teaching and Economics in Dialogue
[…] capital and labor taxation, the gender wage gap, health economics, Social Security, voting and the economics of aging […]
5
WEBINAR: The Economic Costs of the Pandemic: Catholic Social Teaching and Economics in Dialogue
lumenchristi.org – May 1, 2020
[…] capital and labor taxation, the gender wage gap, health economics, Social Security, voting and the economics of aging […]
3
Post-Acute Care Policy Expert: PDGM May Support COVID-19 Treatment
homehealthcarenews.com – March 19, 2020
[…] Grabowski’s work is concentrated on the economics of aging, with a focus on post-acute care and long-term care […]
6
Postdoctoral Specialized Training Program in the Demography and Economics of Aging | Center for Health and the Social Sciences
chess.uchicago.edu – February 3, 2020
[…] Candidates must be interested in demography or the economics of aging and have a PhD or equivalent graduate degree […] Previous research in demography or the economics of aging is not necessary; however, a future commitment is […]
1
Top Gerontology Schools: List of the Top Schools in the U.S.
study.com – January 10, 2020
[…] units of coursework in topics such as aging and public policy, social and ethical issues in aging, the economics of aging and aging and dementia […]
129
Is Great Information Good Enough? Evidence from Physicians as Patients
http://www.nber.org – December 25, 2019
[…] 26038 Issued in July 2019 NBER Program(s):Program on the Economics of Aging, Program on Children, Health Care Program, Health Economics Program, Public Economics Progra […]
3
How home value shocks drive spending | VOX, CEPR Policy Portal
voxeu.org – December 23, 2019
[…] ), Advances in the Economics of Aging, 241–68, Chicago, IL: University of Chicago Press […]
2
COLUMN: Why am I still working at age 95? | Life | kelownadailycourier.ca
http://www.kelownadailycourier.ca – December 16, 2019
[…] Nicole Maestas, an associate professor of health policy at Harvard studies the economics of aging, health and disability […]
4
Health Insurance and Mortality: Experimental Evidence from Taxpayer Outreach
http://www.nber.org – December 15, 2019
[…] 26533 Issued in December 2019 NBER Program(s):Program on the Economics of Aging, Health Care Program, Health Economics Program, Public Economics Program We evaluate a randomize […]
2
GIFFORD-JONES: Why I’m still working at age 95
torontosun.com – December 14, 2019
[…] Nicole Maestas, an associate professor of health policy at Harvard, studies the economics of aging, health and disability […]
23
How can France best reform its pensions system? | Euronews
http://www.euronews.com – December 10, 2019
[…] in the 1940s, when the French welfare was first introduced, Melissa Petit, a sociologist studying the economics of aging and pensions, told Euronews […]
13
More than a quarter of young Canadians aged 15 to 19 are caregivers, research shows
phys.org – November 25, 2019
[…] disability or aging, said lead researcher Janet Fast, a U of A family economist who specializes in the economics of aging and the paid and unpaid care work of family members […]
1
More than a quarter of young Canadians aged 15 to 19 are caregivers, research shows
http://www.folio.ca – November 25, 2019
[…] disability or aging, said lead researcher Janet Fast, a U of A family economist who specializes in the economics of aging and the paid and unpaid care work of family members […]
4
Does One Medicare Fit All? The Economics of Uniform Health Insurance Benefits
http://www.nber.org – November 24, 2019
[…] 26472 Issued in November 2019, Revised in December 2019 NBER Program(s):Program on the Economics of Aging, Health Care Program, Public Economics Program There is increasing interest in expanding Medicar […]
1
FSI | Shorenstein APARC – Pricing the Priceless: Measuring the Value of Healthy Aging
aparc.fsi.stanford.edu – November 7, 2019
[…] At a time when the economics of aging is inseparable from the economics of healthcare, successful adaptations to older population ag […]
2
The effect of old-age pensions on health care utilization patterns and insurance uptake in Mexico | BMJ Global Health
gh.bmj.com – November 1, 2019
[…] Perspectives on the economics of aging […]
1
Asian Economic Integration Report, 2019/2020: Demographic Change, Productivity, and the Role of Technology
http://www.eastwestcenter.org – October 31, 2019
[…] McGarry’s research focuses on the economics of aging, particularly on the roles of public and private transfers in affecting the well-being of th […]
5
Soft Skills Research Paper ⋆ Research Paper Examples ⋆ EssayEmpire
research-paper.essayempire.com – October 11, 2019
[…] In addition, studies in the economics of aging emphasize the importance of soft skills as an instrument to compensate for the decline in cognitive […]
2
Caring for aging parents as an only child
http://www.marketplace.org – September 25, 2019
[…] How is your family navigating the economics of aging and elder care? Send us a comment using the form below […]
18
Revolutionary Memes Extreme’s guide to Leftism Version 4.5
wtfflorida.com – September 22, 2019
[…] range of issues you may find interesting from how water and oceans are treated under capitalism, to the economics of aging: https://www […]
24
UH economics professor receives award from South Korea President
http://www.hawaii.edu – September 18, 2019
[…] Dividend and Population Aging in Asia and the Pacific (2016, special issue of the Journal of the Economics of Aging) […]
3
Analysts think the aging population is hurting the economy. Here’s why they’re wrong
http://www.nextavenue.org – September 4, 2019
[…] of studies demonstrating the benefits of experience, including several from the Munich Center for the Economics of Aging […]
2
The Economics of Aging and the Frailty Index – Federal Reserve Bank of Atlanta
http://www.frbatlanta.org – September 3, 2019
Economy Matters examines Atlanta Fed research into the frailty index, a tool that helps assess individuals' well-being.
1
20 Years of European Economic and Monetary Union: Selected takeaways from the ECB’s Sintra Forum
http://www.ecb.europa.eu – September 3, 2019
[…] between aging, inflation and pension systems”, MEA Discussion Papers, No 06-2018, Munich Center for the Economics of Aging, Munich […]
4
20 Years of European Economic and Monetary Union: Selected takeaways from the ECB’s Sintra Forum
http://www.ecb.europa.eu – September 3, 2019
[…] between aging, inflation and pension systems”, MEA Discussion Papers, No 06-2018, Munich Center for the Economics of Aging, Munich […]
4
Is An Aging Population Hurting The U.S. Economy?
http://www.forbes.com – August 25, 2019
[…] of studies demonstrating the benefits of experience, including several from the Munich Center for the Economics of Aging […]
3
The effect of automatic enrolment on debt | VOX, CEPR Policy Portal
voxeu.org – August 17, 2019
[…] ), Perspectives on the Economics of Aging, Chicago: University of Chicago Press: 81-121 […]
2
Sustaining Economic Growth and Social Security in Aging Economies
development.asia – July 23, 2019
[…] Human Capital, and Saving: Take It Now of Enjoy It Later?Journal of the Economics of Aging […]
3
Designing for Independent Living
http://www.hbawake.com – July 19, 2019
[…] The economics of aging-in-place modifications are a no-brainer […]
2
Spain’s Formula to Live Forever –
foreignpolicy.com – July 4, 2019
[…] Antonio Huertas, the head of Mapfre, a leading insurance company, and the co-author of a book on the economics of aging […]
1
Opportunities Emerge as the Global Population Rate Slows
http://www.linkedin.com – July 2, 2019
[…] In Europe, East Asia and the United States, the challenges will be dual: On the domestic front, the economics of aging will surely lead to political frictions and even social conflict if health care and pensio […]
1
The cost of complexity in the Medicare Part D market | VOX, CEPR Policy Portal
voxeu.org – May 28, 2019
[…] ), Explorations in the Economics of Aging, University of Chicago Press, 159-82 […]
3
Most Older Americans Face Age Discrimination in the Workplace, New Survey Finds –
workinglongerstudy.org – May 23, 2019
[…] This work is part of The AP-NORC Center for Public Affairs Research Journalism Fellowship on the Economics of Aging and Work […]
1
FSI | Shorenstein APARC – Financing Longevity: Addressing the Challenges of an Aging World
aparc.fsi.stanford.edu – May 23, 2019
[…] and policy to examine empirical and theoretical research on a range of problems pertinent to the economics of aging from the perspective of sustainable financing for long lives […]
10
Professional Tips On Becoming A Family Caregiver
http://www.jupitermag.com – May 3, 2019
[…] You can learn more about these work benefits, community resources for caregivers, the economics of aging and more at SoFIA’s “Aging in South Florida Symposium” at Nova Southeastern University on June 21 […]
1
Professional Advice On How To Become A Family Caregiver
[…] You can learn more about these work benefits, community resources for caregivers, the economics of aging and more at SoFIA’s “Aging in South Florida Symposium” at Nova Southeastern University on June 21 […]
3
Expert Tips On Becoming A Family Caregiver
[…] You can learn more about these work benefits, community resources for caregivers, the economics of aging and more at SoFIA’s “Aging in South Florida Symposium” at Nova Southeastern University on June 21 […]

Pensions vs Lifetime Isas: Eight Ways To Work Out Which Is Best

Boosting your savings: Under40s can open a pension or a Lifetime Isa, and use them to save for retirement with help from the taxpayer

Savers under the age of 40 can open a pension or a Lifetime Isa, and use them to save for retirement with help from the taxpayer. In an ideal world, having both would be the best option, but if savings are limited there are clear advantages in maximizing workplace pension savings first.

Higher rate taxpayers will also get a bigger bonus from pension saving. That said, savers should consider both options. There are a number of important factors to take into account when choosing how best to boost retirement savings with taxpayer handouts.

What to weigh up when deciding how to save for retirement

1. Free money from your employer

For employees, joining a workplace pension offers the added advantage of a tax-free employer contribution. Employees earning over £10,000 a year, between the age of 22 and 66, must be offered a pension scheme, with the employer paying 3 per cent of earnings. The employee pays 4 per cent and tax relief adds a further 1 per cent.

Many employers offer more generous schemes and not joining or opting out is giving up ‘free money’. Employers cannot pay into a Lifetime Isa.

* Taxpayers resident in Scotland are eligible for tax relief at 21% if income is over £25,159, 41% if income exceeds £43,430, and 46% if income is over £150,000 (Source: LEBC)

2. Higher earners benefit from pensions

Those paying tax at a higher rate get a bigger bonus from pension savings. A higher rate taxpayer sees £6 saved grow to £10, and for a top rate taxpayer, £10 saved costs just £5.50.

Should you open a Lifetime Isa?

How they work, and what’s on offer to young savers hoping to get on the housing ladder? Read a This is Money guide here. Taxpayers resident in Scotland can gain an extra 1p in the pound as they pay tax at 21 per cent if income is over £25,159, 41 per cent if income exceeds £43,430, and 46 per cent if income is over £150,000.

For nil or basic rate taxpayers, the Lifetime Isa and pension offer the same taxpayer bonus of 20 per cent, so that £8 saved is worth £10 invested. Both offer the same tax-free roll up of funds, with no tax to pay on fund growth or income.

When the money is paid out the Lifetime Isa has the advantage of offering a tax-free income, whereas 75 per cent of the pension paid out is treated as taxable income.

3. Pending (and possible) rule changes

There is speculation the Budget on 3 March could end higher rate tax relief for pension savers. Should this happen then or in the future it will increase the attraction of the Lifetime Isa, which pays a tax-free income in retirement.

Meanwhile, a Treasury consultation, published on 12 February, looks at the best way to implement an increase in the age from which pensions can pay out from 55 to 57, effective from April 2028.

This may increase further in line with the rising state pension age 10 years later. Lifetime Isas can pay out from the age of 60. A narrowing gap between the age at which savers can gain penalty-free access makes the choice less clear, especially as Lifetime Isas pay out tax-free but pensions are partly taxable.

4. What if you have no earned income

Those without earnings can save £4,000 a year into a Lifetime Isa. However, if they have no earned income, they can save only £2,880 into a pension, so the taxpayer subsidy is up to £720 a year in a pension but up to £1,000 in a Lifetime Isa.

5. What if you do earn income or profits

Where more than £4,000 is available for saving long term, those with earnings or self-employed profits can save in a pension the lower of their earnings/profits in the year or £40,000 into a pension, but only £4,000 into a Lifetime Isa.

6. Age restrictions

Lifetime Isa savers can pay in and earn the bonus only between the age of 18 and 50. Pension savers can start at birth and continue until 75. Starting a Lifetime Isa before the age of 40, then funding a pension from the age of 50, could provide a good combination of tax-free income from the Lifetime Isa and taxable income from the pension.

If the pension and other sources of income fall below the personal allowance for income tax (currently £12,500), all the income could be tax-free.The Lifetime Isa offers access before the age of 60, with a lower penalty than applicable if a pension was accessed prior to age 55 (57 from April 2028).

7. Leaving funds to loved ones

Lifetime Isas cannot be continued beyond death and form part of the taxable estate.Pension funds can be left to others to continue, with tax-free investment, and do not usually form part of the taxable estate.

8. Choice of products

It is easy to open a pension, or simply not opt out if your employer auto enrolls you into one. Choice of Lifetime Isa providers is more limited and most offer only a cash deposit option. For long term saving for retirement a stocks and shares Lifetime Isa has more potential to maintain its purchasing power alongside inflation, but could go down in value in the short term.We run down what’s available here.

Kay Ingram:  How to make taxpayer handouts work for you

 

By Kay Ingram For This Is Money

 

Source: Pensions vs Lifetime Isas: Eight ways to work out which is best | This is Money

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Happy Retirees? Maybe Not Why Life Satisfaction Isn’t Necessarily ‘U-Shaped’ After All

Happiness, experts say, is U-shaped: generally speaking, we are happy/full of life satisfaction as young adults but, as we reach middle age, we become less satisfied, with a trough in one’s early 50s; from this trough we rebound to ever-increasing satisfaction levels as we age. It’s remarkable, really, considering the physical infirmities we face, plus financial worries, loss of loved ones, and more. What explains this? We become wiser and we are able to see all of life’s ups and downs with a greater sense of perspective.

But what if that’s not true?

A new working paper by Peter Hudomiet, Michael D. Hurd and Susann Rohwedder, researchers at RAND Corporation, suggests an entirely different answer: older individuals have greater life satisfaction because the less-satisfied folk have been weeded-out. And by “weeded-out” I mean that they’re dead or otherwise unable to reply, because the likelihood of dying is greater for those who have less life satisfaction. When they apply calculations to try to strip out this impact, the effect is dramatic: rather than life satisfaction climbing steadily from the mid-50s to early 70s, then remaining steady, they see a steady drop from the early 70s as people age.

Here are the three key graphs (used with permission):

First, life satisfaction plotted by age without any special adjustments:

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Life satisfaction by age, unadjusted
Life satisfaction by age, unadjusted used with permission

Second, the difference in mortality between the satisfied and the unsatisfied:

Mortality by age and life satisfaction
Mortality by age and life satisfaction used with permission

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And, third, the same life satisfaction graph, adjusted to take into account the impact of the disproportionality of deaths:

Life satisfaction adjusted for death rates
Life satisfaction adjusted for death rates used with permission

In this graph, the blue line represents the unadjusted outputs from their calculations, the orange line is smoothed, and the grey line adds in demographic, labor market and health controls, to strip out the impact of, for example, people in poor health being less satisfied and try to isolate the impact solely of age.

Here are the details on this calculation.

The data they use for their analysis comes from the Health and Retirement Study (HRS), a long-running survey of individuals age 51 and older at the University of Michigan, sponsored by the National Institute on Aging. It is a longitudinal study; that is, it surveys the same group of people every two years in order to see how their responses change over time, adding in new “refresher cohorts” to keep the survey going. The survey asks about many topics, including income, health, housing, and the like, and in 2008, the survey also began to ask life satisfaction, on a scale of 1 to 5 (”not at all satisfied” to “completely satisfied”).

One simple way of analyzing the data is to look at how life satisfaction ratings vary based on survey participants’ characteristics. The average reported life satisfaction of those between ages 65 – 74 is 3.91, just slightly below “4 – very satisfied.” But those who rate their health as “poor” average out to 3.13, or not much more than “3 – somewhat satisfied,” and those who rate their health as “excellent” average to 4.34. Those who have 2 or more ADL (activities of daily living) limitations some out to an average of 3.32 vs. 3.97 for those with no such limits. Those who are in the poorest quarter of the survey group come out to 3.7 vs. 4.07 for the wealthiest quarter. (See the bottom of this article for the full table; this table and the following graphs are used with permission.)

But here’s the statistic that throws a monkey-wrench into the data:

“On average, the 2-year mortality rate [that is, from one survey round to the next] is 4.4% among those who are very or completely satisfied with their lives, while it is 7.3% (or 66% higher) among those who are not or somewhat satisfied with their lives.”

As a result, “those who are more satisfied with their lives live longer and make up a larger fraction of the sample at older ages.”

Now, this does not say that being pessimistic about one’s life causes one to be more likely to die. Nor does it say that this pessimism is justified by being in ill-health and at risk of dying. But this statistical connection, as well as further analysis of survey drop-outs for other reasons (such as dementia) is the basis for a regression analysis which results in the graph above.

What’s more, the original “inventor” of the concept of the life satisfaction curve, David Blanchflower, published a follow-up study just after this one. One of their key concepts is the notion of using “controls” to try to identify changes in life satisfaction solely due to age rather than changes in income over one’s lifetime, for example, or other factors, and there has been extensive debate about whether or to what degree this is appropriate, given that the reality of any individual’s life experience is that one does experience changes in marital and family status, employment status, and the like.

Having received pushback for this concept, they defend it but also insist that the U-shape holds regardless of whether “controls” are used or not. At the same time, Blanchflower is quite insistent that the “U” is universal across cultures, though (see my prior article on the topic) it really seems to require quite some effort to make this U appear outside the Anglosphere, which is all the more interesting in light of the John Henrich “WEIRDest people” contention (see my October article) that various traits that had been viewed by psychologists as universally-generalizable are really quite distinctive to Western cultures and, more distinctively, the United States.

But here’s the fundamental question: why does it matter?

On an individual level, to believe that there is a trough and a rebound offers hope for those stuck in a midlife rut. It’s a form of self-help, the adult version of the “it gets better” campaign for teenagers.

On a societal level, the recognition of a drop in life satisfaction for the middle-aged might be explained, by someone with the perspective of the upper-middle class, as the result of dissatisfaction with a stagnating career, failure to achieve the corner office, the challenge of shepherding kids into college, and the like. In fact, when I wrote about the topic two years ago, that’s how the material I read generally presented the issue.

But Blanchflower’s new paper recognizes greater stakes: “These dips in well-being are associated with higher levels of depression, including chronic depression, difficulty sleeping, and even suicide. In the U.S., deaths of despair are most likely to occur in the middle-aged years, and the patterns are robustly associated with unhappiness and stress. Across countries chronic depression and suicide rates peak in midlife.” (In the United States, among men, this is not true; men over 75 have the highest suicide rate.)

And what of the decline in life satisfaction among the elderly?

The premise that the elderly become increasingly satisfied with their lives as they age is a very appealing one, not just because it provides hope for us individually as we age. It serves as confirmation of a more fundamental belief, that the elderly are a source of wisdom and perspective on life. Although it is Asian cultures which are particularly known for veneration of the elderly, the importance of caring for those in need is just as much a moral imperative in Western societies, even if without the same sense of “veneration” or of valuing them to a greater degree than others in need.

Consider, after all, that the evening news likes to feature stories of oldsters running marathons or competing in triathlons or even just having a sunny outlook on life; no one likes to think of the grumpy grandmother or grandmother from one’s childhood as representative of “old age.” In this respect, “old folks are more satisfied with life” provided an easy to make the elderly more “venerable.” Hudomiet’s research might force us to think a bit harder.

As always, you’re invited to comment at JaneTheActuary.com!

Full table of impact of demographic characteristics on life satisfaction:

Impact of demographic characteristics on life satisfaction
Impact of demographic characteristics on life satisfaction used with permission

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Elizabeth Bauer

Elizabeth Bauer

Yes, I’m a nerd, and an actuary to boot. Armed with an M.A. in medieval history and the F.S.A. actuarial credential, with 20 years of experience at a major benefits consulting firm, and having blogged as “Jane the Actuary” since 2013, I enjoy reading and writing about retirement issues, including retirement income adequacy, reform proposals and international comparisons.

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Wes Moss Money Matters

So, are you setting yourself up for true happiness as a retiree? Sure, you’re planning the money piece, and that’s important. But, there’s also the personal piece of the retirement equation that’s just as important as the money part. Read more: https://www.wesmoss.com/news/7-skills… The 4% Rule: https://www.wesmoss.com/news/the-new-… Retirement Calculator: https://www.yourwealth.com/retirement… Send me your questions directly at https://bit.ly/3dPKcvd (contact box in top right corner) You Can Retire Sooner Than You Think https://bit.ly/3kiRhXJ Money Matters with Wes Moss podcast https://spoti.fi/3jk9wL8 or on Apple Podcasts https://apple.co/3kwKvhj Twitter: https://bit.ly/2HqnWfe Facebook: https://bit.ly/3kvrHi4 Check out my website for more financial tools and articles: https://bit.ly/3dPKcvd Please note, this information is provided to you as a resource for informational purposes only and should not be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. There will be periods of performance fluctuations, including periods of negative returns. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

Retiring During A Bull Market: What’s A Safe Withdrawal Rate?

Lucky you, to be retiring today, when your retirement assets are so richly valued. But not as lucky as you think. Rich stock and bond prices help only so much.

The big question for someone living off savings is how much can be safely pulled out every year. The old rule of thumb was 4%: If you had $1 million in your IRA, you could spend $40,000 the first year and kick up the annual withdrawal just enough to match inflation. At that rate you probably wouldn’t outlive your assets. Such a conclusion could be reached by looking back at stock and bond returns over the past century.

But now, with asset prices high? When prices are high, it’s easier for them to fall and harder for them to keep up with the cost of living. That changes everything.

We are living in strange times. Yields on bonds are abnormally low—indeed, for safe Treasury bonds, yields scarcely top the rate of inflation. Earnings yields are stocks are abnormally low, too. That is the same as saying that price/earnings ratios are high.

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Who knows why this is. It could be that investors are irrationally exuberant, or that the globe is awash in savings, or that the Federal Reserve is tossing dollars out of helicopters. Whatever the cause, it complicates the matter of safe withdrawal rates.

Stock prices have doubled in the last seven years. That helps, since you will be selling stocks as you age. But it doesn’t leave you in a position to double your spending.

To see why, imagine that your sole investment asset is a nice rental property. The real estate generates, say, $30,000 a year of rent after expenses. Suppose that last year the building was worth $500,000 but that now, amidst real estate euphoria, it’s worth $1 million, even though the rental income is no higher. Are you better off? MORE FOR YOUThe Best Places To Retire In 20209 Defenses Against The Biden Tax IncreasesThe Funds With The Smartest Investors, And The Funds With The Dumbest

Yes and no. If you are about to sell the building and use the proceeds to acquire a sailboat, you are better off by a factor of two. If, on the other hand, you’re planning to hold onto the real estate and cover living expenses with the income from it, you are no better off at all.

A new retiree sitting on a pile of stocks and bonds is midway between those extremes. If your assets need to last you 30 years, but not forever, you are half landlord and half sailor. Like a landlord you are earning a current return on your assets, and that current return drives a lot of your spending power. But you are also, like the sailor, selling off a little of the property every year, and property prices matter for that.

In November 2013 the S&P 500 index hovered around 1,800, and index earnings came to $100 for the year. The index has climbed to 3,600 but earnings are down, to an estimated $94 for 2020. That equates to a current earnings yield of 2.6%, down from 5.6% in 2013. The earning power of equity capital is meager, and that makes for meager future returns in the stock market.

Yes, earnings will rebound a bit with the arrival of vaccines and the resumption of a normal economy. But they won’t double next year. They will remain small in relation to today’s stock prices.

The story is the same in fixed income. Yields on long-term Treasuries (1.6%) are a bit less than half as high as they were seven years ago (3.8%). If you bought some of those bonds in 2013 you’re looking at a handsome gain in their value, but this gain does nothing for the interest coupons on the bonds. If you are trying to live on the interest without dipping into principal, you are no better off.

Your IRA statement probably says that you are twice as rich as you were in 2013. Nice, but don’t get carried away. The percentage of the account you can spend annually has gone down. That is the consequence of low bond yields and low stock earnings yields.  

What’s a safe withdrawal rate now? That’s a matter of debate. A 3% draw seems defensible; at this level, I think, you can afford to give yourself raises to keep up with the CPI. It’s appropriate for a newly retired 67-year-old who might live to 97, or whose spouse might live until 2050.

That is, a $1 million account, somewhat conservatively invested 60% in stocks and 40% in bonds, is good for $2,500 a month to start. If inflation comes to 2%, you can step up to $2,550 a month the second year.

You could go higher than 3% if you knew there wouldn’t be any stock market crash early in your retirement, and if you also knew there wouldn’t be any burst of inflation between now and 2050. But you can’t know either of these things.

You could also go higher if you were emotionally equipped to cut your spending during a crash in stock or bond prices. Belt-tightening would protect more of your principal from the irrecoverable damage of selling in a down market. Not everyone is so equipped.

Related: Expected Returns 2020-2040 Follow me on Twitter

William Baldwin

William Baldwin

I aim to help you save on taxes and money management costs. I graduated from Harvard in 1973, have been a journalist for 45 years, and was editor of Forbes magazine from 1999 to 2010. Tax law is a frequent subject in my articles. I have been an Enrolled Agent since 1979. Email me at williambaldwinfinance — at — gmail — dot — com.

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Rob Berger

The Coronavirus has plunged us into the first bear market in more than a decade. Here’s how those in or nearing retirement can handle their investments to navigate the market crash with confidence. RESOURCES Vanguard Advisory Services: https://investor.vanguard.com/financi… Fee-only Advisors: —https://planvisionmn.com/https://rickferri.com/ Personal Capital: http://bit.ly/2IXHuFr Morningstar: http://bit.ly/3dgN1VI 4% Rule–William Bengen’s original 1994 article: http://www.retailinvestor.org/pdf/Ben… ABOUT ME While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I’m the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money. I’m also the author of Retire Before Mom and Dad–The Simple Numbers Behind a Lifetime of Financial Freedom (https://www.retirebeforemomanddad.com/) LET’S CONNECT Youtube: https://www.youtube.com/channel/UC9C1… Facebook: https://www.facebook.com/financialfre… Twitter: https://twitter.com/Robert_A_Berger DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.

What Employee Benefits Will Help You Retire With Confidence?

I’m sort of a geek when it comes to retirement planning surveys. I’m always looking for nuggets that are going to help people save more.

Although I know this is a perilous time for employment in general, it’s always essential to know how your employer will help you save for retirement.

“The pandemic has put pressure on the American workforce in ways few could have predicted and employees need support more than ever,” says Jonathan Bennett , head of Group Benefits at The Hartford. “Now is the perfect time for employers to address employees’ changing attitudes about benefits.”

What should you be looking for in terms of retirement-friendly benefits? Here’s what a Hartford survey found in terms of perks of “increased interest”:

  • Employee assistance programs. 
  • Student loan repayment plans.
  • Behavioral/mental health services. 
  • Wellness benefits 

While these benefits may not appear to directly put money into your nest egg, they will help you get there. If you can get help paying for college loans, parental assistance or out-of-pocket medical bills, that will certainly free up more money for retirement savings. Recommended For You

Of course it’s up to employers whether they want to boost your benefits package. If in a job transition, you can seek employers that offer these perks. If you’re staying put, though, it doesn’t hurt to ask your HR department if they can improve their offerings.

John F. Wasik

John F. Wasik

I speak and write about innovation, investor protection, employment, money management, economics, college financing, retirement and social issues. My latest book is “Winning in the Robotic Workplace,” a guide to prospering in the age of workplace automation. I’ve also written”Lightning Strikes,” a biography on the great inventor Nikola Tesla. All told, I’ve written 18 books including “Keynes’s Way to Wealth” and “The Debt-Free Degree.” I’ve also been a contributor to the New York Times, The Wall Street Journal and other global publications. I’ve appeared on CNN, FOX, NBC, MSNBC, NPR, PBS and radio stations. I’ve spoken across North America.

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