Singles and Couples Face Distinct Planning Hurdles

Findings from a new research paper, “Couples’ and Singles’ Savings After Retirement,” by Mariacristina De Nardi, Eric French and John Bailey Jones, suggest singles “live less long than people who are part of a couple, but are more likely to end up in a nursing home in any given year.”

For that reason, the researchers suggest, a single should expect to have higher medical spending than a member of a couple.

As stated in the paper and an accompanying explanatory brief, the researchers worked to “model the saving problem of retired couples and singles facing uncertain longevity and medical expenses in [the] presence of means-tested social insurance.” The team’s goal was to identify a data-based methodology for evaluating the complex interplay of the various saving motivations and investment opportunities for couples and singles in this situation.

Explaining the key features of their model, the researchers note that a couple’s assets tend to drop sharply with the death of a spouse. “By the time the second spouse dies, a large fraction of the wealth of the original couple has vanished, with the wealth drops at the time of death of each spouse explaining most of the decline,” the paper says.

The researchers therefore observe that a large share of the decline in assets of a given retired couple over time is due to the high medical expenses most people face preceding death. “This suggests that a large fraction of all assets held in retirement are used to insure oneself against the risk of high medical and death expenses,” the paper says.

This does not exactly line up with the conventional wisdom that singles and couples slowly spend down assets in a smooth fashion over time, for example to cover basic living expenses. 

Still, many retired U.S. households, especially those who are couples and have high income, do in fact spend their assets very slowly, “and many people die with large amounts of wealth,” the paper continues. “Basic life cycle models, with no uncertainty, cannot match these patterns. This raises the question of what drives retirees’ saving behaviors. An important complementary question is how the behavior of couples compares with that of single people.”

NEXT: Spending patterns are noisy 

The researchers find being in a couple during retirement “allows its members to pool their longevity and medical expense risks, but also exposes each member to their spouse’s risks, including the income loss that often accompanies a spouse’s death. Because about 50% of Americans age 70 or older are in a couple and about 50% are single, the answers to this question are key in understanding how the elderly’s savings and welfare would respond to potential policy reforms.”

The trio of researchers go on to show that medical expenses and government-provided insurance are important for revealing the saving patterns of single U.S. retirees at all income levels, including high-permanent-income individuals who keep large amounts of assets until very late in life.

“Another important benefit of our methodology is that our model can be used to infer the effects of changing age or family structure on annuitized income for the same household,” the researchers conclude. “For example, our estimates imply that couples in which the male spouse dies at age 80 suffer a 40% decline in income, while couples in which the female spouse dies at age 80 suffer a 30% decline.”

Some of the other implications of the model are downright astounding and show just how variable the retirement planning outlook can be from individual to individual. “For example, a 70-year-old single man at the 10th permanent income percentile in a nursing home expects to live only 2.9 more years, while a 70-year-old married female at the 90th percentile in good health, married to a 73-year-old man in the same health state, expects to live 18.6 more years.”

De Nardi is a professor at University College London, a faculty research fellow at the National Bureau of Economic Research, and a research fellow at the Institute for Fiscal Studies. Eric French is a professor at University College London and a senior economist and research adviser at the Federal Reserve Bank of Chicago. John Bailey Jones is an associate professor in the Department of Economics at the State University of New York (SUNY) at Albany.