Are you planning your retirement all wrong?

As retirement approaches (however you personally define retirement), it’s understandable that you’re concerned about the risks you face. But maybe you’re just worrying too much about it not correct ones.

That is the conclusion of economist Wenliang Hou and the basis of a recent article he wrote for the Center for Retirement Research (CRR) at Boston College, “How well do retirees assess the risks they face in retirement?(Hou learned while he was working there; he is now a quantitative analyst in the Fixed Income department at Fidelity Investments.)

The 5 major retirement risks

Basically, says Hou, there are five major risks in retirement:

· longevity risk – the risk of outliving your money

· market risk — the risk of volatility in the stock and housing markets

· Health risks — the risk of unexpected medical costs and the need for care

· family risk — the risk of divorce, death of a spouse or partner and adult children becoming ill or unemployed

· political risk — the risk of insolvency of the Social Security Trust, leading to a 20% to 25% cut in pension benefits if policy changes are not made

Hou compared each individual’s actual risks (referred to as objective or empirical risks) to how people perceive the likelihood of those risks (referred to as subjective risks). To do this, he reviewed the University of Michigan’s biennial Health and Retirement Survey, which surveyed about 20,000 people over the age of 50, and then looked at the data.

What he found: “People underestimate their longevity and they overestimate market volatility,” Hou told me.

What people fear most vs. reality

More specifically, Hou ranked the public’s perception of their retirement risks in this order: market risk, longevity risk, health risk, family risk, and political risk. But her real Annuity risks, he discovered, are, in this order: longevity risk, health risk, market risk, family risk, and policy risk.

“Longevity is the biggest risk because people need to spread their resources over the retirement period to make decisions,” says Hou.

People who are not realistic about their possible life expectancy may not be saving as much as they need or may spend more than is reasonable when they retire.

Also, Hou says, “they may be making the wrong decisions about when to stop working and start applying for Social Security benefits.”

Quitting work for full-time retirement may mean no more saving for retirement in a 401(k). Applying for Social Security when, say, 62 years of age reduces the amount of your old-age pension compared to waiting until your mid or late 60s. You receive 8% more from Social Security for each year you live between your full retirement age (typically 66) to 67) and the 70th year of life.

Read MarketWatch’s Help Me Retire column

The longevity mistake we make

Americans often predict their longevity based on their parents’ ages, which can be in their 70s, Hou says. But we generally live longer than our parents.

Current mortality statistics indicate that the average life expectancy of a male in the United States today, 65 years old, is about 87 years; a 65-year-old woman to about 89.

According to the Society of Actuaries, the expected life expectancy of both men and women has increased by more than 10% since the year 2000, as noted by author Mark Miller in his excellent forthcoming book, Retirement Reboot: Commonsense Strategies for Getting Back on Track.

Because averages are averages, you may be living in your 90s or 100s — or not. Of course, it is impossible to know exactly how long you will live. Your genes play a role. This also applies to your current health, your future health, your medical history, the possibility of an accident or victim of a crime, and simply the unexpected.

I’m 66 and the rudimentary (and, alright, slightly morbid) Actuary Longevity Calculator calculated that I have a 71 percent chance of living to 80, a 55 percent chance of living to 85, and a 31 percent chance of living to 90. I take these figures into account in my retirement planning.

Market Risk: Real, but not as bad as you might think

Regarding market risk, Hou wrote that “individuals, on average, have very pessimistic and greater expectations of volatility than the empirical evidence suggests.” In fact, their expectations for market volatility are almost double what the data shows.

Here’s the problem: “If you feel like you’re losing a lot of money, stop investing.” And that’s not ideal,” says Hou. “Should we stop investing for the long term? I would probably say ‘no’.”

I understand why so many are so nervous that stock market volatility is shrinking their retirement savings. Hoo too. “People are exposed to daily headlines [about market volatility] and they keep that in the back of their minds,” he admits.

But, Hou explains, if you live longer, you also end up reducing the negative impact of a year’s stock market volatility on your retirement.

Read: This is the “secret ingredient” to retirement happiness

How a stable lifetime income can help

Since longevity and market risks are #1 and #2 risks to retirement, he says, “It’s better to have stable lifetime income resources” to cover them.

This could mean using some of your savings to buy an annuity (an insurance company product that provides a fixed monthly income). Or it could mean turning part of your 401(k) into a retirement pension, which has been simplified by the Federal SECURE Act of 2019. The insurance industry sometimes calls annuities “protected income.”

As Jean Statler, executive director of the Alliance for Lifetime Income – the insurance industry’s pensions education group – told me, “There is a fixed income you can get in retirement that is guaranteed and will protect you from the ups and downs of the volatile market. The answer to risk is certainty, and pensions give certainty.”

But few people buy instant annuities in retirement — the kind that provides a monthly income soon after purchase.

In a 2021 CRR paper, Hou and two colleagues wrote that “the US market for annuities is tiny.” Their 2018 sales totaled $9.7 billion, while long-term care spending totaled about $150 billion, they noted. The authors said some people avoid annuities because the products are expensive; Some don’t like the idea of ​​handing over control of their life savings to insurers.

Statler says her group’s research shows A third of finance professionals are now more likely to recommend an annuity for retirement due to the current climate of rising interest rates, inflation and fears of market volatility.

However, Cyrus Bamji, Chief Communications Officer of the Alliance, adds: “There is a huge gap between what clients are demanding and looking for – which is a type of sheltered income – and which consultants think You want to. This is one of the gaps we are working to fill.”

Social Security also provides a stable lifetime income, conveniently in the form of a monthly pension.

“I would say Social Security is the best option for retirement income,” notes Hou. “And if people can delay claiming Social Security to match their actual risk, that’s better.”

Monthly benefits for people who defer claiming Social Security until age 70 (which few can afford) are at least 76% higher than those claiming at 62.

Prepare for health risks in retirement

Health risks in retirement, or rather health care Costs retired, must be taken into account and planned for. But they’re also often underestimated, says Hou. In his research he states: “One can really see the large gap between expected and actually paid medical expenses in old age”.

According to Fidelity Investments annual forecast The average 65-year-old retired couple may need about $315,000 to cover their retirement healthcare costs.

And that doesn’t include the possibility of long-term care costs, which can be exorbitant. The average cost of a private room in a nursing home in 2022 is $108,405 Genworth Cost of Care Study. For assisted living, it’s $54,000. A home help costs $61,776.

As Hou wrote, “Long-term care is a significant risk for retirees, but one they often underestimate.” Better designed public programs and private products could help protect retirees with limited financial resources from this potentially catastrophic risk, he added.

What do you worry about?

I would like to know: what pension risks are she most concerned and what are you doing about it?

Please email me for a possible follow-up column. Thanks very much!

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