Financial Well-Being in Late Life: Understanding the Impact of Adverse Health Shocks and Spousal Deaths

This paper uses data on the over-65 population drawn from ten waves of the Health and Retirement Study (HRS) to explore the role of health shocks in contributing to the draw-down of retirement wealth. Such shocks are common. For example, the lifetime probability of being diagnosed with arthritis is 55 percent for a 65-year-old arthritis-free woman, and 46 percent for a man. For a stroke, the probabilities are 24 percent and 21 percent, respectively. We focus on eight health conditions. For six, we cannot reject the null hypothesis that net worth is unaffected by a new diagnosis. For the other two, stroke and lung disease, we find substantial net worth declines, about $25,000 and $29,000, following diagnosis. The decline in wealth is larger for those with substantial initial wealth than for those with relatively little. We also calculate a 65-year old’s expected reduction in wealth, over his remaining lifespan, for each potential health shock. Taken together, we estimate the average expected “wealth cost” of health shocks to be 3 percent of household net worth at age 65 for single men, 9 percent for married men, 10 percent for married women, and 14 percent for single women. These disparities are more reflective of differences in average wealth by group than of differences in the change in net worth coincident with diagnosis.