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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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.

Guide To Dividend Funds For Retirees: 36 Best Buys

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You could live off dividends. Although stocks on average yield only 1.7%, it is quite feasible to assemble a collection of blue chips that are paying out 3% of their purchase price. That means a $1 million pot could produce $2,500 of monthly income, with reasonable prospects for seeing that income keep up with inflation over the next several decades.

You could do this yourself, buying a lot of dividend-rich stocks on your own. Or you could have the work done for you by owning a fund. This guide will steer you to 36 excellent choices—8 open-end funds and 28 exchange-traded ones—that yield 3% or better.

These funds are cost-efficient. The open-end (that is, traditional mutual) funds on this list are no-loads running up expenses no higher than 0.25% of assets annually. The ETFs cost no more than 0.15% annually.

Example: the iShares Core High Dividend ETF, whose $5.6 billion is invested in AT&T T +0.9%, Exxon Mobil XOM -0.6% and 73 other stocks. Expenses are a very reasonable 0.08%, or $8 annually per $10,000 invested.

Pay attention to expense ratios. If you are not careful, you can send a lot of money down a drainhole. This principle will be illustrated below.

Here are the winning funds:

By historical standards, a 3% yield from stocks isn’t terrific; the average payout rate over the past century is considerably higher. But you take what you can get. For a retiree aiming to live off a portfolio without eating it away, blue chips are a lot more plausible than bonds these days. U.S. Treasuries due in 2040 yield only 1%, and they are guaranteed to fail at keeping up with the cost of living.

changelly3

Stocks, unlike those Treasuries, are risky. They periodically crash. You can perhaps withstand that uncertainty. You could put some of your money in low-yielding bonds and plan on selling bonds, not stocks, if and when you need extra spending money during a bear market.

There’s more to reflect on than the risk. Here are five other things to think about before making a big commitment to high-dividend stocks as a source of retirement income.

1. You’re making a trade-off. Growth and yield are two different ways to get a total return. More of one means less of the other.

You can choose the mix. Young savers might prefer growth, owning companies like Netflix NFLX 0.0% and Amazon AMZN -0.7%, which pay out nothing but are fast-growing. Retirees might prefer AT&T and Exxon, which pay rich dividends but are on a plateau.

The average stock falls between these extremes. The Vanguard Total Stock Market index fund yields 1.7% and owns companies that collectively grow at a moderate pace, faster than Exxon but slower than Amazon.

It is delusional to think that you can have high yields without sacrificing growth. If stocks yielding 3% had as much growth as the average stock, then their total return would be 1.3% higher than the total return on the market. And if that were true, we could all become arbitrage billionaires by owning the high yielders while shorting the market. This is not going to happen.

Accept the reality. To get a high yield, you have to give something up.

2. Dividends aren’t the only way to draw income. If you need to spend 3% of your portfolio every year, you are not compelled to buy stocks like AT&T. There’s a second method to obtaining cash. You could invest in stocks with lower dividends and sell some shares periodically.

You could, for example, buy that Vanguard fund covering the whole market (its ticker is VTI), pocket the 1.7% in dividends, and then supplement the income with the sale every year of 1.3% of your fund shares.

Go with the high-dividend funds if you prefer. There is something appealing in that arrangement to people who were trained by the grandparents to never “dip into capital.”

The truth, though, is that the sustainability of your capital is not determined by its current yield, or by the number of shares you sell off. It is instead determined by your total return. Don’t assume that your capital will last any longer with a high-dividend fund than it would with VTI.

3. You can wind up with a lopsided portfolio. Aim for the very highest yields and you’ll probably have an overdose of oil companies, real estate investment trusts and European stocks. These might do very well for the next decade, but they might do horribly. Pay attention to diversification. In selecting from the high-yield list, don’t overdo the sector and global funds.

4. There will be cuts. Derivatives speculators in Chicago are betting that the dividend on the S&P 500 index will fall from $58 in 2019 to $56 in 2020 and $51 in 2021 before beginning a slow recovery. Allow for this. The yields you see in the table sare for a trailing 12-month interval. They somewhat overstate what you’re likely to collect in the near future.

Cuts are especially likely among the energy funds with double-digit yields.

5. Costs matter. The funds on our Best Buy list are cost-efficient. A lot of what brokers sell is not.

Paying more costs than you have to can do serious damage. An incremental percentage point of cost compounds, over 30 years, to a 26% slice out of a static account (one without contributions or withdrawals).

Some investors are incapable of conceptualizing this. To illustrate, I will cite one curious fund that is much sought after by yield seekers: Gabelli Equity Trust.

This closed-end uses borrowed money to buy more stocks, which means that it should have outsized returns in bull markets and very bad results in bear markets. How has it done? Not well. Despite the leverage, it hasn’t kept up with the bull market over the past decade.

Given that disappointment and the fund’s savage 1.3% expense ratio, you’d expect that shares would trade at a hefty discount to the portfolio value. Instead, they trade at a 3% premium.

What is the appeal of this fund? It pays an enormous dividend, equal to 12.6% of the portfolio annually. Evidently the buyers haven’t been informed about the fund’s lagging total return. They are gullible enough to think that it’s easier to retire on a fund with a high payout.

It’s okay to seek dividends. It isn’t okay to be naive.

Follow me on Twitter.

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.

Source: https://www.forbes.com

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