Are We Worrying About the ‘Right’ Retirement Risks?

As if there wasn’t enough to worry about regarding retirement—a new research paper suggests we’re not worrying about the “right” things.

More precisely, that paper, published by the Center for Retirement Research at Boston College, was titled, “How Well Do Retirees Assess the Risks They Face in Retirement?” And, as you might suppose, the answer provided at the conclusion of the paper is—“not very well.” 

The premise of the paper relies on the author’s identification of five major risks in retirement, which turn out to be:

• Longevity risk (the risk of outliving one’s resources)
• Market risk (the financial risk not only from the markets, but from things like the housing market)
• Health risk (the risk of unexpected medical and long-term care expenses)
• Family risk (the risks arising from divorce, death, or the unexpected illness of an adult child)
• Policy risk (notably the sustainability at current benefit levels of Social Security)

Arguably, all of these are legitimate risks that need to be considered and dealt with as part of any reasonable retirement plan, though one might argue that even these aren’t exhaustive (consider, for example, inflation—but more on that in a moment).

The paper’s author performs some statistical alchemy and then determines that the three top risks retirees should be worrying about are:

(1) longevity; (2) health; and (3) market.

But, according to the author’s analysis retirees are most worried about are:

(1) market; (2) longevity; and (3) health.

Now, despite the headlines[i] that followed the publication—and aside from the specific ordering—those actually seem to match up pretty well to me. However, the “point” seems to be that retirees are more worried about the market than they “should” be, that the bigger risks to their retirement are that they might outlive their savings—and/or that their bad health might drain them faster than expected—but they’re focused on the market impact on savings. Bottom line: retirees are worried about the “wrong” things.

At this point, a couple of points should be made. First, the assessment of what these retirees are worried about was drawn from 2016 data. And secondly, the conclusions about what retirees are concerned about are gleaned from a series of questions in that databank[ii]—which, with the “help” of the author’s calculations, are turned into those weighted sentiments of concern. And then, having crafted some subjective sense of the relative concerns of those elements, the author purports to establish the “objective” benchmark against which they are to be judged. 

Market risk falls relatively low on this scale because of his assumed 20-year investment horizon in retirement, though retirees may lack that confidence, particularly these days.

The paper’s author concludes by highlighting the need to educate the public on these various retirement risks (and presumably their relative importance, based on their likely impact), most specifically the need for lifetime income products (to shield against the longevity risk) and long-term care support (to buffer against the health care concerns).

Now, I’d argue that a judgment based on subjective 2016 data doesn’t tell us much about what retirees (particularly these days) are actually concerned about—and even if it did, it doesn’t seem to me that there’s enough difference in priorities to matter. 

To me, it’s not so much which risks retirees are concerned about, much less their ordering—but that they are aware of the potential risks and seeking help on how best to mitigate them. But what I do think is important—and here I agree with the study’s author—is (more) education about the multiple potential risks to retirement security—and not just for those already in retirement, but for those of us still trying to make preparations against those risks. 

- Nevin E. Adams, JD

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[i] Retirees are underestimating retirement risk, study finds, Seniors Badly Misjudge Key Retirement Risks, When saving for retirement, seniors overestimate market volatility and underestimate life expectancy.

[ii] The source data—the Health and Retirement Study (HRS)—asks respondents to assess the probability of various outcomes. The respondents give a number from 0 to 100, where 0 means absolutely no chance and 100 means absolutely sure to happen. And for these purposes, the questions ranged from “the probability that stocks will be worth more next year than they are today,” to the chance of gaining 20% or more over the next year and the chance of losing 20% or more, to the probability of the probability of spending $1,500 or more in the coming year on health care.