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What worries you most about retirement? Well, if you're like most retirees and pre-retirees maintaining the value of your savings and having your investments keep pace with inflation concern you most, according to a new survey published by the Society of Actuaries.
And having enough money to pay for health care and long-term care rounds out the top three concerns, according to the 32-page 2013 Risks and Process of Retirement Survey Report — Understanding and Managing the Risks of Retirement.
These findings might not come as a surprise to anyone saving for or living in retirement. But there's plenty in the SOA report that you ought to consider no matter whether you're retired or saving and planning for retirement.
"There are areas where people can do a little bit more planning," said Cindy Levering, a retired pension actuary and member of the SOA's Committee on Post-Retirement Needs and Risks. Here's a look at some of the key findings and some action items.
First off, people aren't too concerned about some of the risks of retirement, according to the SOA report. And two, many retirees are unaware of all the risks they might face in retirement. For instance, the SOA suggests that many people are unconcerned with or unaware of the risk of fraud or a scam.
"The one that struck me in (our) report is that very few people were concerned with being a victim of fraud or scam," said Levering. She noted that people, especially as they get older and their cognitive abilities change, may think that they won't be taken in by a scam or fraud, but it happens all the time.
So, action item No. 1 for retirees and pre-retirees would be this: At a minimum, become familiar with all the in-retirement risks and the ways that you can manage them, especially those involving scams and fraud.
Americans, or at least those surveyed in the SOA report, are seemingly focused on cash flow management, and managing expenses so that they could be covered by current income. "They seemed more focused on dealing with risks as they occurred than as part of specific risk management strategies that anticipate them," wrote the authors of the report.
Said Levering: "We found that people generally don't have a very long planning horizon. They are looking at it on a more day-to-day basis, adjusting their expenses to meet their income. And while that might work when things are going along nicely, if there are huge (unanticipated) expenditures such as home repairs, car repairs, health or long-term care, that all goes out the window."
Retirees and pre-retirees also say they will reduce significantly expenses if it looks like they will run out of money due to unforeseen circumstances in retirement. And some might try to return to work, downsize their house, and dip into money they might have otherwise left to their children or other heirs. The actionable advice given this finding: Reducing expenses ought to be viewed perhaps as a last-resort risk management strategy. Contemplate first-resort strategies long before you run out money due to unforeseen circumstances.
Seize the moment. Don't worry if, as a pre-retiree, you are more concerned about your short- and long-term financial future than current retirees. That's the norm apparently. What should worry you, especially if you are already retired, is this: Many retirees who are unconcerned with in-retirement risks have neither the resources nor a plan in place for risks such as long-term care. The takeaway? Don't wait until it's too late to acquire the resources and to put in place plans to deal with retirement risks.
Many retirees and pre-retirees think inflation will have an adverse effect on the amount of money they will need in retirement. And they would be right in thinking that. Consider: Something that cost $1 in 1983 would cost $2.30 in 2013. Or think of it this way, you'd need set aside $2.30 today to pay from something that would cost $1 in roughly 30 years — which is roughly the duration of retirement for some.
And, as many know, with the exception of Social Security, most income paid to retirees does not increase with inflation, according to the SOA. So, someone planning for 30 years of retirement, would need to factor in how to invest to keep pace with inflation, especially for expenditures that increase even faster than the general rate of inflation such as health care.
That means pre-retirees and retirees will need to consider investments and products that offer some protection against inflation such as stocks, Treasury Inflation-Protected Securities (TIPS); inflation-adjusted income annuities, and the like. (FYI: Use the U.S. Inflation Calculator to measure the buying power of the dollar over time.)
Retirees and pre-retirees will also need to watch proposals that would change the basis for Social Security benefits, according to the SOA. Those proposals, if ever approved, would likely reduce cost-of-living adjustments to Social Security beneficiaries.
Other than health insurance, pre-retirees and retirees are also less likely to use "risk-pooling" strategies to manage retirement risks, according to the SOA report. One reason has to do with money. Many don't have enough financial assets at the time of retirement or during retirement to use effectively risk-pooling strategies. Instead, most resource-constrained retirees try not to spend down assets as one way to avoid outliving their money.
To be fair, Levering said the study doesn't suggest that retirees and pre-retirees put all their life savings into annuities. "For most people you probably don't want to annuitize everything," she said. "You want to have money available to meet these crisis or these financial shocks that might occur."
But she does recommend that you consider risk-pooling products. "It's daunting because there are so many different products, it's very difficult to compare them," she said. "They all have different features and options you can buy for an additional premium. But even though it's daunting it's well worth the exercise of allocating your resources in such a way that you can sleep at night."
Of note, retirees who use a financial planner, as well as those who don't, tend not to use risk-management products, such as annuities. The reason, according to the SOA, is that "there is no general professional agreement or guideline about the correct way to prioritize risks and which risk to cover first." And that's a bit of a problem. You would never find in the field of medicine, for instance, no best practices. But alas this is the field of financial planning where what you get is likely to be quite different from adviser to adviser.
Levering is looking forward to the day when plan providers offer annuities as one of the distribution options to 401(k) plan participants.
And then there's this finding. Many pre-retirees expect to delay retirement. But the reality is that many more people say they want to keep working than actually do. In fact, people actually retire at a much earlier age than people say they want to retire due to involuntary and pushed retirements. The bottom line given this finding: Working longer is an important risk-management strategy, but you'll need to plan as if you won't be able to keep working. In addition, consider other work options such as phased retirement, part-time work, telecommuting, seasonal work, and the like.
And the last finding from the SOA study worth noting is this: Many people don't understand the variability of life spans, or realize that they might be the family member who lives long.
And this is an especially big problem for the surviving member of a couple — which is, more often than not, the wife. And few couples plan for this according to the SOA. To be fair, Levering said "when you drill down to the individual level it's a hard thing to wrap your head around."
And, those planning and living in retirement sometimes overlook or fail to consider that difficulties are much more likely to occur late in retirement particularly as physical and cognitive capacities decline.
"Recognize that your retirement is going to last at least 30 years, so having a 10-year or less planning horizon is probably not a good thing," said Levering. "It may seem daunting to some people but maybe think of it in buckets and have something to protect you in the three different phases of retirement, especially when you get to the older ages, where maybe you're not as able to deal with all of the decisions and financial complexities that are involved."