Retirement Readiness: Risks and Perceptions
How financially ready are most Americans for retirement? What threatens pre-retirees’ financial stability during the accumulation phase? A May 5 session at LIMRA’s 2016 Retirement Industry Conference offered some hard data on perceptions of — and risks to — retirement readiness.
Andrew Peterson, Senior Staff Fellow, Retirement Systems for the Society of Actuaries (SOA), and Mathew Greenwald, president of the market research firm Greenwald & Associates, presented findings from the most recent SOA retirement risk survey and focus groups they convened in conjunction with that research.
The main effort in which pre-retirees and current retirees are engaged, they said, is maintaining or increasing their asset levels. In order to do that, many retirees cut spending significantly, and most adjust spending after they cover a major expense. Many spend the required minimum distributions they receive, and some reduce spending by limiting it to needs, rather than wants.Shocks
An especially potent threat to retirement readiness, they found, are “shocks” — that is, major and sometimes disastrous life events — and unexpected expenses. These include:
- adult children who can’t support themselves;
- divorce during retirement;
- some home-related expenses; and
“Some unexpected expenses are predictable,” said Greenwald, “but timing is not.” Not only that, he added, “Most unexpected expenses are manageable, but they can be significant.”
How significant? Greenwald said that 10% of those who had experienced shocks had to cut their spending by at least half as a result. And many retirees who experienced shocks are relatively fatalistic, according to their research — approximately 60% believe they could not have done anything to lessen the financial impact of a shock.Top Concerns
So what are retirees — and pre-retirees — most concerned about? Greenwald said the top concerns they identified are:
1. Insufficient funds to cover long periods of nursing care in a center or at home (69% of pre-retirees and 58% of retirees)
2. Value of savings and investments won’t keep up with inflation (69% of pre-retirees and 52% of retirees)
3. Insufficient funds to cover health care (67% of pre-retirees and 47% of retirees)
4. Might not be able to maintain a reasonable standard of living (63% of pre-retirees and 45% of retirees)
Interestingly, it may be that some of those concerns are alleviated by experience and unpleasant possibilities not materializing. Greenwald said that they found that the long-term retirees “seemed more confident and less anxious than more recent retirees.” In addition, pre-retirees were more likely than those who actually are retired to think inflation will affect the amount of money they will need each year in retirement.Preparing for Risks
How do retirees and pre-retirees expect to steel themselves against risks to their financial stability during retirement? The top tool on which they rely, said Greenwald, is cutting spending, followed by eliminating debt and saving as much as possible.
As for the nitty-gritty of cutting spending:
- 90% would accomplish that by purchasing less;
- 70% would eat out less frequently;
- 56% would reduce travel; and
- 44% would cut back on giving and donations.
But cutting spending could lose its luster due to demographics, Greenwald warned. He said that it will be increasingly hard for future generations to reduce spending and adjust to unexpected expenses in retirement because they will not have the first-hand example their parents did of a previous generation that had to handle the Great Depression and live more frugally in order to do so. “They will be really unhappy” with going from covering wants to simply covering needs, he said.Report Card
Peterson said that current retirees are doing well with adapting to shocks, adjusting spending to preserve assets and benefiting from parental example. But regarding planning, the grade is improvement needed.
How can those planning grades improve? Peterson and Greenwald suggest:
- budgeting for the unexpected;
- using insurance products to mitigate risks during retirement;
- advising retirees on targets for their financial asset levels based on age and other factors;
- incorporating planning for non-routine expenses in retirement planning;
- anticipating repairs and replacement of items that have a predictable life, such as cars, furnaces and roofs;
- forming a strategy for long term care; and
- making a good choice regarding Medicare plans.
Still, overall Greenwald said that most retirees are doing better than some may expect, and that “retirees are often very resilient.”