A new brief from the Center for Retirement Research at Boston College finds that not only will retirees face higher out-of-pocket health costs but also the potential for financial mistakes thanks to cognitive decline and the problems caused by widowhood.

This as more-meager 401(k)s supplant pensions and the Social Security retirement age rises.

Indeed, the report points out that as retirees become more reliant on 401(k)/IRA lump sums, which can be considerably smaller overall than the lifetime benefits presented by a traditional pension plan, and as the full retirement age for Social Security rises, meaning that “monthly Social Security checks will provide less relative to preretirement income at any given claiming age,” future retirees as they age are going to be making do with less reliable income even as inflation eats away at what they have.

Lengthening life spans mean that more people will make it to age 75 and older—at which point, says the report, physical and mental health problems grow, creating a faster and larger drain on savings thanks to high out-of-pocket medical costs or financial mistakes.

In addition, those older retirees will be coping with those problems on the shaky and smaller sums provided by 401(k) plans just as they are growing increasingly unable to manage more challenging financial decisions — such as how to draw down from those accounts to achieve the maximum benefit from the money available.

The rate of dementia, says the brief, rises quickly from 7 percent for people in their early 70s to approximately a quarter for those in their early 80s—and that means that those people are increasingly at risk for making financial mistakes or being taken in by outright fraud.

And the rise of out-of-pocket medical costs, even without the need for long-term care, includes such items as Medicare Part B and Part D premiums, supplemental coverage, rising copayments and deductibles and the costs involved with care not covered by Medicare.

The report cites a recent study by McInerney, Rutledge, and King (2017) that “found that, for those ages 75+, these out-of-pocket costs amounted to about 20 percent of their total income.”

While that's “significant … but perhaps manageable” for most households, the study says, about 5 percent of households end up forking over more than half their income and are probably compelled to eat into savings to keep ahead of expenses.

And once long-term care enters the picture, wealth can be consumed far faster.

Then there's widowhood, which also poses a threat, particularly to women — even though recently women's financial situations in retirement have improved, decreasing their risk of poverty in retirement, because they are earning more in the workplace.

But if Social Security benefits are cut in a move to stabilize the program, the report warns, “poverty rates could worsen again.” And because of the way widow's benefits are designed, “with a widow entitled to the larger of her own benefit or her husband's … widows' household income from Social Security drops more than it used to when a husband dies.”

So while they may be less likely to end life in poverty, “a drop in their standard of living or the need to dig into their wealth might become more common.”

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