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.

It's About Time

Most of the surveys and research in our industry focus on the shortcomings – a lack of savings, of diversity in investment, of failure to maximize the employer match, or to have access to the programs that support those opportunities. There is, however, a shortfall that doesn’t garner much attention.

I’m talking about time.

And while time is often treated as an “enemy” of retirement planning (sometimes under the “longevity” label), certainly when there is a concern about outliving one’s resources, or perhaps when too little time remains to make preparations, there is another aspect: a retirement cut short.   

This is heavy on my mind of late – not just because this week marks the anniversary of the Sept. 11 attacks, though that’s certainly a factor.

My recollections of that awful day notwithstanding, I’ve been particularly mindful of the untimely passing of three individuals of my acquaintance in recent weeks: a relative, a colleague, and an associate here. Two were not even thinking about retirement when their time came – one had been eagerly looking forward with anticipation to a retirement she’ll never have.

Now I’m not privy to the particulars of the financial plans of these individuals – the needs that their unexpected passing may present for others – or what steps, if any, they may have taken to ease the financial circumstances for those they left behind. I hope they had that opportunity, but know all too well that many don’t.

People die tragically and prematurely every day, of course. Most of them are unknown to us, and nearly all are unnamed to us. And as the recent mass shootings remind us, on any given day, any one of us could go to work, or to the store – and simply not come home.

Ironic as it sounds, death is a part of life. Thoughtful individuals prepare for the possibility of death –through faith, sacrifice and, with luck, sound financial planning. However, most don’t dwell on those realities, and that’s doubtless a good thing.

In this business, we spend a lot of time worrying about the risks of outliving our retirement savings. In fact, surveyed workers increasingly seem to rely on an assumption that they will work longer, or save more later, to make up for their current shortfalls.

However, and perhaps particularly on this anniversary eve of the Sept. 11 attacks, it’s worth remembering that we don’t always have as much time as we might think – or want.

It’s time we did.

- Nevin E. Adams, JD

5 Reasons to Plan and Save for Retirement Now

As April is National Financial Literacy month, and this is National Retirement Planning Week, those who work with retirement plan participants know it’s important to do the right thing(s) when it comes to retirement planning and savings.

But for those you are trying to help encourage, here are five reasons to plan and save for retirement now, and as an integral part of that financial plan.

Because you don’t want to work forever.

Seriously, no matter how much you love your job, if you want to stop working one day – and trust me, you will – you are going to have to think about how much income you will need to live after you are no longer working for a paycheck.

Because living in retirement isn’t “free.”

Many people assume that expenses will go down in retirement – and, for many, perhaps most, they do. On the other hand, there are changes in how we spend in retirement as well – and they aren’t always less. A recent report by the nonpartisan Employee Benefit Research Institute (EBRI) notes that health-related expenses are the second-largest component in the budget of older Americans, and a component that steadily increases with age. Health care expenses capture around 10% of the budget for those between 50–64, but increase to about 20% for those age 85 and over,” EBRI notes. And those spending shifts don’t take into account the possibility of a need or desire to provide financial support to parents and/or children.

Because you may not be able to work as long as you think.

In 1991, just 11% of workers expected to retire after age 65. Twenty-five years later, in 2016, 37% of workers report that they expect to retire after age 65, and 6% say they don’t plan to retire at all, according to the 2016 Retirement Confidence Survey. At the same time, the percentage of workers who say they expect to retire before age 65 has decreased, from 50% in 1991 to 24% in 2016.

However, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned – nearly half (46%) in 2016, in fact. Many who retired earlier than planned say they did so because of a hardship, such as a health problem or disability (55%), or changes at their employer such as downsizing or closure.

The bottom line: Even if you plan to work longer, the timing of your “retirement” may not be your choice.

Because you don’t know how long you will live.

People are living longer, and the longer your life, the longer your potential retirement, especially if it begins sooner than you think. Retiring at age 65 today? A man would have a 50% chance of still being alive at age 81 (and a woman at age 85); a 25% chance of living to nearly 90; a 10% chance of getting close to 100. How big a chance do you want to take of outliving your money in old age?

Because the sooner you start, the easier it will be.

As recently as the 2015 RCS, fewer than half (48%) of workers report they and/or their spouses have tried to calculate – even a single time – how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

Whether or not you feel fully financially “literate” now, you need to have a plan for your retirement. And there’s no time like the present to start.

- Nevin E. Adams, JD