Context
Due to the decline of defined benefit plans in the United States, Social Security and long-term savings in defined contribution plans and retirement accounts have become primary, rather than supplemental, sources of retirement income. This reduction in retirement income sources combined with lower personal savings and rising livings costs means that at least half of all Americans are at risk of not having enough money to maintain their living standards in retirement. Not having enough long-term savings is the greatest single sign of insufficient retirement wealth. However, the ways in which people spend, save, borrow and plan their money throughout the life course are also important, contributing to their overall financial health upon reaching retirement age. Recent data from the Center for Financial Services Innovation (CFSI) has shown that among low- and middle-income groups, only 13 per cent of pre-retirees and 20 per cent retirees are financially healthy.
The study
This 2018 report was commissioned to provide a deeper understanding of the extent to which lower- and middle-income (LMI) groups are struggling to spend, save, and borrow money in their day-to-day lives. The analysis presented in this report uses CFSI’s eight indicators of financial health, which are grouped into the below four domains:
Spend
- Spend less than income
- Pay bills on time and in full
Save
- Have sufficient living expenses in liquid savings
- Have sufficient long-term savings or assets
Borrow
- Have a sustainable debt load
- Have a good credit score
Plan
- Have appropriate insurance
- Plan ahead for expenses
CFSI has a survey tool that measures a consumer’s financial health using eight questions, grouped into the four domains listed above. A score is then derived for each consumer. In this report, the financial health measurement and scoring methodology are applied to detailed survey data from the CFSI’s existing Consumer Financial Health Study. Pre-retirees are defined as anyone above the age of 55 who is still working
Key findings
- Having sufficient emergency savings is a significant financial health challenge for both LMI pre-retirees and LMI retirees.
- Only 9% of LMI pre-retirees and 15% of LMI retirees scored as financially healthy on the savings indicators.
- While more than half of pre-retirees (55%) who were not classed as LMI said they could ‘make ends meet’ for more than six months after losing their primary income source, this dropped to just 19% of LMI pre-retirees.
- While seven-in-ten retirees (71%) who were not classed as LMI said they could ‘make ends meet’ for more than six months after losing their primary income source, this dropped to just 28% of LMI retirees.
- Nearly half of all LMI pre-retirees struggle to pay their bills on time and in full.
- Only 14% of LMI pre-retirees and 9% of LMI retirees are financially healthy when it comes to having income that exceeds expenses.
- Just over half (55%) of LMI pre-retirees pay all of their bills on time, compared to 83% among those not classed as lower or middle income.
- Only three-quarters (75%) of LMI retirees pay all of their bills on time, compared to 94% among those not classed as lower or middle income.
- The majority of pre-retirees and retirees, both LMI and non-LMI, have debt. One-in-seven (15%) of all retirees reported that their debt was ‘unmanageable’.
- While just 5% of those pre-retirees who were not classed as LMI said they had ‘far too much debt’, this increased to 16% of LMI pre-retirees.
- Only 3% of retirees who were not classed as LMI said they had ‘far too much debt. However, this increased to 11% of LMI retirees.
- The report suggests that individual savings remain critically important, and it’s important to do everything possible to support and encourage long-term savings activity.
- The report also presents three innovation opportunities that have the potential to help solve financial health challenges for LMI pre-retirees and retirees. These involve:
- Helping LMI pre-retirees build a liquid savings reserve;
- Helping LMI pre-retirees and LMI retirees pay their bills;
- Helping pre-retirees and retirees make next dollar decisions about debt.
- It concludes by stating that helping Americans save more for retirement is ‘win-win’. Financial service providers can succeed when there are more assets to manage, while consumers will succeed when they are financially healthy and have enough income to enjoy their retirement.
Points to consider
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Methodological strengths/weaknesses: While the methodology appears robust, there is little detail on representativeness, weighting or statistical testing, meaning there is an element of uncertainty regarding the methodological approach.
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Generalisability/ transferability: This report is of significant interest to policymakers, stakeholders and other parties interested in financial challenges affecting people in the period pre- and post-retirement, particularly those immersed in an American policy environment.
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Relevance: While these findings are based on data from a US survey, some of the learning outcomes may be transferrable to a UK context.
