Manage Your Retirement Risks to Reduce Your Anxiety

Millions of older Americans have anxieties about their financial security in their retirement years. Will they have a reliable income for the rest of their lives to cover their living expenses? Can they prevent having their savings wiped out by high bills for medical and long-term care expenses? These are legitimate concerns, ones that can prevent people from truly enjoying their retirement years.

Put solid plans in place to address these concerns, however, and you'll feel a lot better about the future. Not sure where to start? That's where actuaries can help. We measure the odds and financial consequences of various life risks, such as premature death, high medical bills, long-term care expenses, and longevity risk (yes, living too long is considered a risk!). Then we design programs, strategies, and products to protect against these risks, such as life insurance, medical insurance, pension plans, annuities, and so on. We've been called the "architects of financial security," and we love to do the math to analyze and develop solutions for common financial challenges.

The Society of Actuaries recently released a report entitled 2009 Risks and Process of Retirement Survey, which summarizes the results of a telephone survey taken of more than 800 Americans regarding their awareness of common risks in retirement. The survey sample was selected to be representative of households in America headed by a person between the ages of 45 and 80. I participated in the oversight committee for this project.

Many of the results represent common concerns of many Americans, but it was interesting to see the exact numbers:

• Inflation is a top concern, cited by 58 percent of current retirees and 71 percent of pre-retirees.
• Depleting savings is also a concern, cited by 47 percent of retirees and 58 percent of pre-retirees.
• Reducing debt is the top strategy cited to address these concerns, starting with eliminating consumer debt, cited by 81 percent of retirees and 90 percent of pre-retirees. Digging further into the data, eight out of ten respondents have paid off or plan to pay off their mortgage upon retirement or soon after (77 percent of retirees and 80 percent of pre-retirees). However, retirees are now less likely to report that they've already completely paid off their mortgage (48 percent in the 2009 report, down from 56 percent in the 2005 report).
• Large majorities report having to cut back on spending, cited by 68 percent of retirees and 78 percent of pre-retirees.

One of the more interesting and insightful findings is the planning horizon that pre-retirees report for making important financial decisions, such as whether they can afford to retire or purchase a new home. The median planning horizon was just 10 years. One-quarter of respondents look between five and 10 years out, and 13 percent look less than five years into the future. And one in 10 say they don't know what their planning horizon is.

Houston, we've got a problem! If you're in your fifties or sixties, you could live another 20 or 30 years. (See my prior post, How Long Do You Have to Live?) I encourage anybody who's reached the mid-century mark to start planning the rest of their life--and to do it now!

While you don't need to make every decision with a 20 to 30 year time horizon, some of the decisions you'll be making for retirement will have a lifelong impact. Examples include how much you're saving now for retirement, how you're investing those savings, steps you take now to improve your health, whether to purchase long-term care insurance, and certain elections on drawing down your retirement resources. So, these decisions need careful attention with a "rest-of-life" time horizon in mind.

The 2009 retirement risk report is a treasure trove of information on strategies that Americans are planning to use to manage various retirement risks, such as asset allocation, drawdown strategies, use of home equity, delaying retirement, and tactics to address medical and long-term care expenses. I'll continue to report on it in future posts.

For a handy chart that identifies common retirement risks and possible solutions, see a report prepared in 2008 by the Society of Actuaries entitled Managing Post-Retirement Risks: A Guide to Retirement Planning. I also participated in the oversight committee for this project. This guide and the above-mentioned retirement risk survey have been prepared by dedicated volunteers with no axes to grind, other than the desire to help people make informed decisions.

Let me just end here with one of my favorite sayings: "Worry is not preparation."

So I encourage you to prepare by adopting solid plans that address the risks you face. You'll worry less and look forward to your retirement years more.

Steve Vernon

View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.

Twitter

Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.