While there is no shortage of research on preparing for retirement, Rappaport maintains “actuaries are the people that have focused on post-retirement, what happens when you actually retire.”
Actuaries focus on things like, how to protect yourself from outliving your assets and how what happens if you need long-term care. Rappaport refers to these as “life risks,” adding, “It’s easy to not think about them until they happen to you.”
As in 2007, the latest SOA poll found the top three concerns about retirement, shared by pre-retirees and retirees alike- remain: inflation, paying for health care and running out of money. The main difference in the 2010 survey is inflation bumped health care to claim the No. 1 spot.
What is more worrisome, the survey shows we’re not making use of strategies and tools to reduce these risks.
According to the SOA survey, the most common steps we’re taking to protect ourselves from retirement worries No.1 (inflation) and No.3 (depleting our resources) are: paying down consumer debt, saving more, and reducing our spending. While all are worthwhile goals, they boil down to the same thing: increasing the size of our retirement nest egg.
Not one takes into consideration the possibility that a major expense such as a long-term illness, could seriously deplete that nest egg, leaving the retiree in dire financial straits.
Buying an annuity or purchasing long-term care insurance don’t even make it onto the radar screens of half of us, although those still in the workforce are much more likely to say they are at least thinking about these options.
Rappaport has an additional suggestion to pad your retirement fund: work a few years longer. “If you can retire three years later… you could be considerably better off,” she says. Those extra years for your pension, 401(k) and Social Security benefits are less years of income you have to provide for yourself. You’ll also save money if you receive health insurance through your employer during that time.
Widowhood, especially for women, is another issue Rappaport feels people aren’t giving enough attention. The latest SOA survey asked participants if they thought they’d be better or worse off financially if their spouse died. About 60% of both pre-retirees and retirees responded their situation would be “about the same.”
But Rappaport points out, in reality, “women are the ones who are usually the survivors and a lot really are worse off.”
A potential solution: second-to-die life insurance.
The latest survey also found a drop in the number of individuals who are “very worried” about paying for long-term care. Although Medicare covers some of the costs of hospitalization, there is no government insurance to help pay for an extended stay in a nursing home, a situation that goes hand-in-hand with our increased longevity.
“I don’t know why people are not more concerned about long-term care than health care,” says Rappaport.
A potential solution: long-term care insurance.
Last, but certainly not least, Rappaport worries about people’s lack of long-term planning.
When making important financial decisions, most retirees say they look just five years into the future. For pre-retirees it’s 10 years. Both ignore the fact that retirement can easily last 30 or more years.
Perhaps the scariest finding of the SOA research is that the majority of both pre-retirees (64%) and retirees (54%) believe that if someone manages their finances well during the first three years of retirement, they’ll never run out of money! On the one hand, this suggests that we recognize the devastating impact a bear market can have if it coincides with the start of your retirement withdrawals.
However, if the past decade is any indication, over a 30-year retirement you’re likely to run into six bear markets. Should one bad market cycle coincide with large out-of-pocket medical expenses, it can drastically reduce your standard of living- and increase the chances you will exhaust your savings- if your primary source of retirement income is your investment portfolio.
But you know who slept like a baby through the gut-wrenching markets of 2008? The retiree with an annuity that kept paying a steady monthly income, regardless where the S&P 500 stood.And don’t forget the widow who nursed her husband through the three-year illness that nearly wiped out their savings, but was just replenished by his life insurance policy.
You get the point. been a rough couple of years: the worst bear market since the 1930s, a mortgage meltdown and high unemployment. But they’ve all had little, if any, impact on Americans’ concerns aboutretirement.The latest survey by the Society of Actuaries [SOA] found no significant change in consumers’ outlook on retirement since the last one was conducted in 2007.
“What surprised us tremendously is that things didn’t change more,” says actuary Anna Rappaport, who chaired the survey.
“We were expecting to see significant changes in risk perception…[that] because of the difficult economy people would tell us they are more concerned about [financial] risks.”
Are we shell-shocked? Numb? In our post-9/11 world, have we simply become inured to unpredictable negative events- be it a terrorist attack, a sharp financial setback, or a natural disaster? Have we reached the point where we hopelessly resign ourselves to fate and conclude, “What will be will be, there’s nothing I can do about it?”
Gustavo A Viera CPA
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