Increased Worry Among Retirees Doesn’t Equate to Action

While American retirees are more concerned about retirement risks than in previous years, a new study by the Society of Actuaries (SOA) shows there has been little change in their risk management strategy over the past two years and concern among the survey researchers that many may be at risk of running out of assets.

“The 2011 Risks and Process of Retirement Survey,” sponsored by the SOA, is the sixth biennial study of post-retirement risks and offers insight into Americans’ awareness of retirement risk, how their awareness has changed over time, and how these perceptions have affected the way they manage their finances.

The survey of 1,600 adults, ages 45 to 80 (800 retirees and 800 pre-retirees), found the greatest retirement planning concerns include protection against inflation, the ability to pay for healthcare, and the cost of long-term care.

“Except for health coverage, insurance products such as annuities and long-term care insurance are not seen as major components of retirement planning,” said actuary and retirement expert Anna Rappaport, FSA, MAAA, who serves as chairperson of the Society of Actuaries’ Committee on Post-Retirement Needs and Risks. “As a result, many retirees continue to be at risk of running out of assets and having to rely solely on Social Security.”

The retirement risks that most concern both retirees and pre-retirees are:

  • Keeping the value of their savings and investments up with inflation (69 percent of retirees, 77 percent of pre-retirees)
  •  Having enough money to pay for adequate health care (61 percent of retirees, 74 percent of pre-retirees)
  •  Having enough money to pay for long-term care (60 percent of retirees, 66 percent of pre-retirees)
  •  Being able to maintain a reasonable standard of living for the rest of their life (59 percent of retirees, 64 percent of pre-retirees)
  • Varying income as a result of changes in interest rates (57 percent of retirees, 64 percent of pre-retirees)
  • Depleting their savings (54 percent of retirees, 63 percent of pre-retirees)

“Notwithstanding this increased concern, retirees and pre-retirees are no more likely than in previous years to report they have used the various risk-management strategies examined in the survey,” said actuary and retirement expert Carol Bogosian, ASA.  “However, retirees are more likely than in 2009 to report they have cut back on spending, saved as much money as they can, and purchased a product or chosen an employer plan option that provides them with guaranteed income for life.”

A major concern is that many people have a shorter planning horizon than their future expected lifetime, according to the SOA. Despite this, retirees are more likely than in 2009 to say their planning horizon is at least 10 years (34 percent, up from 23 percent), while pre-retirees are more likely to say it is at least 20 years (19 percent, up from 13 percent).  Meanwhile, more than one in three pre-retirees feel retirement will not apply to them due to finances or a desire to continue working.

Still, Bogosian points out while more people expect to delay retirement, the “how” and “when” people retire remain key factors pre-retirees need to carefully consider. And, many pre-retirees may be ignoring the possibility of involuntary early retirement.

“There is a major disconnect between when people say they plan to retire and when they actually do,” Bogosian said. “The survey found half of retirees had retired from their primary occupation before age 60. And, though other studies show an increase in the percentage of people over age 65 who are employed, many who lose jobs in their 50s and early 60s experience more difficulty finding new employment than younger people.”

If they were to live five years longer than expected, retirees indicated they would be more likely than in 2005 to:

  • reduce their expenditures significantly (64 percent, up from 53 percent)
  • dip into money that might otherwise have gone toward an inheritance (49 percent of retirees, up from 42 percent), and
  • deplete all of their savings (45 percent, up from 35 percent).

Pre-retirees show no significant change from 2005 in the consequences they anticipate should they live five years longer than expected. In fact, only one-third (35 percent) of pre-retirees have a plan for financing their retirement. Meanwhile, nearly six in 10 retirees (57 percent, up from 44 percent in 2005) report they have a plan for how much money they will spend each year in retirement and where that money will come from.

Since this question was last asked in 2005, the increase in reported prevalence of plans for retirement is encouraging; however, the percentage without plans indicates there is still a long way to go, according to actuary and retirement expert Cindy Levering, ASA, MAAA, EA.

“Retirees who use all of their assets or accumulate debt they cannot realistically expect to repay may face major difficulty,” said Levering. “This can be particularly troublesome for the survivor of a couple after the spouse’s death.”

Planning to use home equity to finance retirement is a precarious strategy, especially in times of reduced housing prices, considering the illiquid nature of real estate, Levering added.

Both retirees and pre-retirees are significantly more concerned about inflation than in 2007, the year the question was previously asked, said Levering. More than four in 10 retirees (43 percent) and pre-retirees (47 percent) report they think inflation will affect the amount of money they will need in retirement a great deal.

“Although Federal policy and unemployment have worked to keep overall reported inflation low in the last few years, retirees feel seriously affected by increases in health care costs, their share of these costs, and by food and energy prices,” Levering said.

The survey also found maintaining a healthy lifestyle is preferred to the purchase of insurance as a means of managing health and long-term care costs. About four in 10 own or plan to buy long-term care insurance, while, just one in 10 indicate they have turned to or will turn to a continuing care retirement community.

“The survey results continue to show the importance of earlier and better planning as well as a more systematic approach to managing all aspects of retirement risk,” Rappaport said.

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