New report outlines retirement risks and identifies solutions

From the high price of milk and eggs to the unprecedented cost of gas, inflation is affecting every American. Among the largest groups affected are the 78 million baby boomers inching ever closer to retirement and current retirees who are experiencing soaring costs in a volatile economy.

In fact, according to the Risks and Process of Retirement Survey Report, a new study from the Society of Actuaries (SOA), inflation is the top retirement concern. According to the report, pre–retirees and retirees are worrying about keeping the value of their assets up with inflation as well as having enough money to pay for long–term care, paying for adequate healthcare and the challenges of maintaining a reasonable standard of living after the loss of a spouse–all of which are also impacted by inflation.

The report identifies concerns raised from both pre–retirees and retirees on their retirement resources and offers approaches to help manage them. "Today's retirement environment is much more complex than it has been for previous generations," said Anna Rappaport, fellow of the Society of Actuaries (FSA), MAAA, chair of the Committee on Post–Retirement Needs and Risks, and leader of the report's project oversight work group. "With generally acknowledged gaps in many employees' retirement benefits and resources, actuaries are helping people understand the risks associated with retirement and the importance of sound management of their retirement funds."

Among today's 65–and–older population, average life expectancy for American men and women is 17 and 20 years, respectively. Nearly one–third (30 percent) of all women and almost 20 percent of men age 65 can expect to reach 90 years old. As a result, pre–retirees and retirees are concerned that inflation will impact the adequacy of their retirement investments and savings by significantly contributing to their depletion. "With life expectancy reaching the highest level ever, there is a real possibility that those in retirement may outlive their assets," said Steve Vernon, FSA, MAAA, and president of Rest–of–Life Communications. To manage this risk, actuarial approaches include investment strategies to preserve principal, such as investing in annuities, joint and survivor annuities and deferred annuities commencing at later ages, such as 75 or 80.

Long–Term Care and Healthcare Concerns Highlighted

The survey also revealed that pre–retirees and retirees are concerned about their ability to afford long–term care. For example, nursing home care costs may reach $70,000 or more per person per year. To manage this risk, actuarial approaches include strategies such as personal health and wellness commitments and long–term care insurance that helps pay for the cost of seniors with care needs.

In addition, pre–retirees and retirees are concerned inflation will impact their ability to afford adequate healthcare. With catastrophic illness, medical costs for an over–65 retired couple not covered by Medicare can be a major financial burden exceeding $1 million over their lifetime. To manage this risk, actuarial approaches include strategies such as medical insurance and Medicare supplements.

Women's Concerns Higher Than Men's

Other findings of the study provide insight into the differences of how men and women perceive retirement risks and are affected by them. Women are more concerned than men that inflation will significantly impact their retirement resources. Such concerns may be magnified for women who have experienced the loss of a spouse. "For retirees living on a fixed income, the longer the period of retirement, the greater the impact of inflation," said Rappaport. "For this reason, women are more adversely affected by inflation than men because of their longer life expectancy. Traditionally, women have been younger than their husbands; therefore, periods of widowhood of 15 years or more are not uncommon. For many women, the death of a spouse is accompanied by a decline in standard of living."

Women expressed higher levels of concern versus men regarding the following risks:

  • Inflation–62 percent versus 51 percent

  • Affording long–term care–57 percent versus 47 percent

  • Healthcare costs–56 percent versus 45 percent

  • Depleting savings–52 percent versus 37 percent

  • Staying in their home–44 percent versus 29 percent

    To manage these risks, actuarial approaches include investment strategies to produce income, including joint and survivor annuities and life insurance.

    Re–envisioning Retirement

    Actuaries are at the forefront of identifying the retirement needs, risks and roles of all stakeholders involved in retirement including consumers and businesses. The Society of Actuaries and its Pension Section Council is spearheading the first–ever Retirement 20/20 initiative. Launched in 2006, Retirement 20/20 is leveraging the insights of more than 60 experts, including leading retirement actuaries, corporate benefits managers, attorneys, public policy advocates and academics. Retirement 20/20 will analyze the retirement landscape with the goal of developing a new retirement system different from traditional defined benefit and contribution plans in the coming years.

    You can read the Today's Retirement Risks Fact Sheet and you can access the full report on the SOA Web site.

    Future Retirement Survey Reports

    In ongoing efforts to identify, understand and manage the retirement risks facing today's pre–retirees and retirees, the SOA will release a series of three retirement survey reports on the phases of retirement, long–term care concerns and retirement risks for women. The SOA's three survey reports are scheduled to be released later this year.

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