Financial Well-being of Older Americans

Executive Summary

The ultimate goal of programs and resources that educate and empower older adults to make informed financial decisions is to improve or maintain their financial well-being as they age. Therefore, understanding financial well-being is key to designing and assessing the effectiveness of those programs and resources. For older adults, like their younger counterparts, financial well-being means being able to meet current and ongoing financial obligations, feeling financially secure in the present and future, and being able to make choices that allow them to enjoy life.

In 2015, the Bureau of Consumer Financial Protection (the Bureau) released a scale to measure a person's sense of financial well-being. The scale expands our understanding of consumers', including older Americans', financial situation beyond traditional measures of socio-economic status like income and wealth. It also provides an opportunity to study how factors such as income, wealth, expenses, financial literacy, goals, and preferences contribute to someone's perception of financial well-being.

This report explores the factors that are associated with the financial well-being of older Americans. It relies on data from the National Financial Well-Being Survey to examine the distribution of financial well-being scores for adults ages 62 and older in the United States. It also examines the association of financial well-being and: (1) age; (2) individual characteristics; (3) employment and retirement; (4) housing situation; (5) debt; (6) family and living arrangement; (7) health-related experience; and (8) financial knowledge, skill, and behavior. It also includes differences in some of these associations for older and younger adults.

Key Findings

  • Age. Older adults have a higher average financial well-being score than younger adults. Yet a quarter of older adults have financial well-being scores indicating that they are financially insecure. Financial well-being increases with age into the late seventies, then declines.
  • Individual Characteristics. Across all subgroups of older Americans, financial wellbeing levels vary and overlap significantly. Differences in financial well-being by sex, marital status, and race/ethnicity are larger at older ages than younger ages.
  • Employment and retirement. Older adults who experience an unexpected job loss or reduction in work hours have lower financial well-being scores than those who remain in the workforce. In addition, an unplanned retirement is negatively associated with older adults' financial well-being. Older adults who have a defined contribution retirement plan and a pension have higher financial well-being scores than older adults with one type of plan or no retirement plan.
  • Housing. Older homeowners have higher financial well-being scores than those who do not own a home. For renters and homeowners alike, having low monthly housing costs is positively associated with financial well-being. In addition, financial well-being is higher among older adults who are highly satisfied with their housing situation and community than among those less satisfied.
  • Family and living arrangements. Older adults living alone have lower financial wellbeing scores than older adults who live with others. Older adults who provide financial support to children have lower financial well-being scores than older adults who do not. Older adults with a financial safety net from family and friends have higher financial well-being scores than those without familial backup.
  • Debt. Older adults who owe credit card and education debt have significantly lower financial well-being scores than older adults who do not have these debts. Carrying multiple debts has a stronger negative association with financial well-being than carrying a single debt. Among older homeowners, carrying a high mortgage balance is negatively associated with financial well-being.
  • Health. Poor health is negatively associated with financial well-being. Confusion or memory loss and having a health emergency are also negatively associated with financial well-being.
  • Financial Knowledge, Skill, and Behaviors. High levels of financial knowledge and skill are positively associated with financial well-being. Older adults who routinely save money and engage in effective day-to-day money management behaviors have a higher financial well-being score than older adults who do not engage in these behaviors. Similarly, older adults who engage in planning behaviors such as setting financial goals, consulting a budget, and preparing an action plan have higher average financial wellbeing scores than older adults who do not engage in these behaviors.

Introduction

The ultimate goal of programs and resources that educate and empower older adults to make informed financial decisions is to improve or maintain their financial well-being as they age. Therefore, understanding financial well-being is key to designing and assessing the effectiveness of those programs and resources. For older adults, like their younger counterparts, financial well-being means being able to meet current and ongoing financial obligations, feeling financially secure in the present and future, and being able to make choices that allow them to enjoy life.

In 2015, the Bureau of Consumer Financial Protection (the Bureau) released a scale to measure a person's sense of financial well-being. The scale expands our understanding of consumers, including older Americans', financial situation beyond traditional measures of socio-economic status like income and wealth. It also provides an opportunity to study how factors such as income, wealth, expenses, financial literacy, goals, and preferences contribute to someone's perception of financial well-being.

This report explores the factors that are associated with the financial well-being of older Americans. It relies on data from the National Financial Well-Being Survey to examine the distribution of financial well-being scores for adults ages 62 and older in the United States. It also examines the association of financial well-being and: (1) age; (2) individual characteristics; (3) employment and retirement; (4) housing situation; (5) debt; (6) family and living arrangement; (7) health-related experience; and (8) financial knowledge, skill, and behavior. It also includes differences in some of these associations for older and younger adults.

About the Financial Well-Being Scale and Score

The Bureau's Financial Well-Being Scale is the first validated and tested tool to measure a consumer's sense of financial well-being. It specifically measures a person's: (1) control over day-to-day and month-to-month finances; (2) capacity to absorb a financial shock; (3) ability to meet financial goals; and (4) ability to make financial choices to enjoy life.

The Financial Well-Being Scale consists of ten questions (Figure 1). An individual's response to each of the ten items in the scale yield a score. The score is a standardized number between 0 and 100 that quantifies a person's underlying level of financial well-being.

A Bureau study found that scores are closely associated with a number of real-life financial experiences, such as paying for basic needs, an unexpected expense, obtaining credit, and having financial resources. Similarly, the financial well-being score is closely associated with traditional measures of socio-economic status like income, education, and wealth. Yet the study found that the score is a more comprehensive measure than solely income and wealth. Because of its variation and ability to capture a variety of financial circumstances, the financial wellbeing score provides a unique opportunity to expand knowledge about how resources, expenses, risks, and financial literacy, goals, and preferences may contribute to older adults' perception of financial well-being.

FIGURE 1: FINANCIAL WELL-BEING SCALE

Questions

Statement

Response Options

How well does this statement describe you or your situation?

  1. I could handle a major unexpected expense.
  2. I am securing my financial future.
  3. Because of my money situation, I feel like I will never have the things I want in life.*
  4. I can enjoy life because of the way I'm managing my money.
  5. I am just getting by financially.*
  6. I am concerned that the money I have or will save won't last.*

Describes me completely

Describes me very well

Describes me somewhat

Describes me very little

Does not describe me at all

How often does this statement apply to you?

  1. Giving a gift for a wedding, birthday or other occasion would put a strain on my finances for the month.*
  2. I have money left over at the end of the month.
  3. I am behind with my finances.*
  4. My finances control my life.*

Always

Often

Sometimes

Rarely

Never

* More affirmative responses indicate lower levels of financial well-being

Financial well-being among older adults Financial well-being and age

On average, adults age 62 and older have a higher financial well-being score than adults ages 18 to 61. The average score for: (1) adults age 62 and older is 60; (2) adults age 18 to 61 is 52; and, (3) all U.S. adults, age 18 and older, is 54. The difference in scores between both groups is statistically significant.

The financial well-being scores for older and younger adults have wide variations. As shown in Figure 2, both groups have about a 35-point spread between the 10th and 90th percentiles.

Moreover, the distribution of scores for both groups overlap substantially.

FIGURE 2: FINANCIAL WELL-BEING SCORES OF OLDER AND YOUNGER ADULTS

About one-in-four (24 percent) older adults have scores of 50 or lower. These scores are associated with high probabilities of experiencing an array of negative financial outcomes, including frequent struggles to pay for basic needs, obtain credit, and pay for an unexpected expense of $2,000 or more. About 55 percent of older adults have scores between 50 and 69, and 21 percent have scores above 70. Scores above 70 are associated with financial security and limited financial hardships.

The scores tend to increase with age. The data also shows a significant increase in the scores at age 65, the eligibility age for health insurance coverage through Medicare. After age 75, the scores begin showing a small decline.

FIGURE 3: AVERAGE FINANCIAL WELL-BEING SCORES BY AGE GROUP

Financial well-being and individual characteristics

Financial well-being scores of older adults increase alongside traditional measures of socioeconomic status such as education and income. Financial well-being scores also vary by sex, marital status, and race/ethnicity. More specifically, males have a higher average financial wellbeing than females, married individuals than non-married individuals, and White non-Hispanic respondents than respondents of other racial/ethnic groups. However, the range of financial well-being scores for each group varies widely, even among older adults with similar levels of income and education (Figure 4).

FIGURE 4: FINANCIAL WELL-BEING SCORES OF OLDER ADULTS AGE 62 AND OLDER BY INDIVIDUAL CHARACTERISTICS

Differences in financial well-being scores for some specific groups are more pronounced at older ages than younger ages (Figure 5). The difference in the average financial well-being score between males and females, married and non-married individuals and respondents who are White non-Hispanic and respondents of other racial backgrounds increases with age.

FIGURE 5: DIFFERENCES IN FINANCIAL WELL-BEING SCORES BY AGE, SEX, RACE, AND MARITAL STATUS

Characteristic

Subgroup

Ages 18-29

Ages 30-44

Ages 45-61

Ages 62 and older

Sex

Male

51

52

54

61

Sex

Female

50

52

54

59

Race/Ethnicity

White, non-Hispanic

51

53

55

61

Race/Ethnicity

Other

50

50

52

52

Marital Status

Married

52

53

56

62

Marital Status

Non-Married

50

49

50

56

Financial well-being and key issues for older adults Employment and retirement

Older adults who experience an unexpected job loss or reduction in work hours have lower financial well-being scores than those who remain in the workforce. In addition, an unplanned retirement is negatively associated with older adults' financial well-being. Older adults who have a defined contribution retirement plan and a pension have higher financial well-being scores than older adults with one type of plan or no retirement plan.

FIGURE 6: AVERAGE FINANCIAL WELL-BEING OF ADULTS AGE 62 AND OLDER BY EMPLOYMENT AND RETIREMENT EXPERIENCES

Housing

Older homeowners have higher financial well-being scores than those who do not own a home. For renters and homeowners alike, having low monthly housing costs is positively associated with financial well-being. In addition, financial well-being is higher among older adults who are highly satisfied with their housing situation and community than among those less satisfied.

FIGURE 7: AVERAGE FINANCIAL WELL-BEING OF ADULTS AGE 62 AND OLDER BY HOUSING EXPERIENCES

Debt

Older adults who owe credit card and education debt have significantly lower financial wellbeing than older adults who do not have these debts. Among older homeowners, carrying a high mortgage balance is negatively associated with financial well-being. Carrying multiple debts has a stronger negative association with financial well-being than carrying a single debt.

FIGURE 8: AVERAGE FINANCIAL WELL-BEING OF ADULTS AGE 62 AND OLDER BY DEBT EXPERIENCES

Family and living arrangements

Older adults living alone have lower financial well-being scores than older adults who live with others. Older adults who provide financial support to children have lower financial well-being scores than older adults who do not. Older adults with a financial safety net from family and friends have higher financial well-being scores than those without such safety net.

FIGURE 9: AVERAGE FINANCIAL WELL-BEING OF ADULTS AGE 62 AND OLDER BY FAMILY AND LIVING ARRANGEMENT

Health

Poor health is negatively associated with financial well-being. Confusion or memory loss and having a health emergency are also negatively associated with financial well-being.

FIGURE 10: FINANCIAL WELL-BEING OF ADULTS AGE 62 AND OLDER BY HEALTH-RELATED EXPERIENCES

Financial knowledge, skill, and behaviors

High levels of financial knowledge and skill are positively associated with financial wellbeing. Financial skill is more strongly associated with financial well-being among older adults than younger adults. Older adults who routinely save money and engage in effective day-today money management behaviors have a higher financial well-being score than older adults who do not engage in these behaviors. Similarly, older adults who engage in planning behaviors such as setting financial goals, consulting a budget, and preparing an action plan have higher average financial well-being scores than older adults who do not engage in these behaviors.

FIGURE 11: FINANCIAL WELL-BEING OF ADULTS AGE 62 AND OLDER BY FINANCIAL KNOWLEDGE, SKILL AND BEHAVIORS

Conclusion

The Bureau study found a higher average financial well-being score for older adults than younger adults. The differences in financial well-being scores by age are likely the result of a combination of factors that are associated with a person's stage in the life-cycle. For instance, many older adults, compared to their younger counterparts, have lower amounts of and fewer debts, higher savings and other safety nets, lower housing costs, and health insurance coverage. These factors may account for the consistent increase in scores as people age. However, the results also show the limits of the positive relationship between age and financial well-being. Scores begin to decline again after age 75. This decline may be due to poor health, living alone, and decreased ability to manage finances, which likely become more common after age 75. The results also show that despite the increase in financial well-being scores with age, over one-fifth of older adults have scores that indicate that they are struggling financially at each stage of the life cycle.

In addition, the positive relationship between age and financial well-being could diminish in light of trends showing that a larger share of older adults reaching age 60 carry mortgage and other debts, and have limited or no retirement savings.