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Managing Post-Retirement Risks – A Guide to Retirement Planning

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We live in an era marked by periods of economic uncertainty and volatility…

[The following is an excerpt from the paper “Managing Post-Retirement Risks – A Guide to Retirement Planning” published by the Society of Actuaries (2008).  The paper in its entirety may be found here: Managing Post-Retirement Risks]

… At the same time increased responsibility has shifted to individuals for securing their financial wellbeing in retirement. And with this added responsibility, retirees may be exposed to a variety of risks that can affect them both as individuals and members of society.

In the following pages you’ll find discussions of a few of the key financial risks that individuals may face in their retirement years and strategies for managing them. The risks described include issues related to longevity, investments, health, loss of loved ones and more.

1.             LONGEVITY RISK: OUTLIVING YOUR RETIREMENT RESOURCES

Background

Managing one’s own retirement funds over a lifetime has many pitfalls, even with expert help. Nobody knows how long the money must last. Life expectancy at retirement is an average, with about half of retirees living longer and a few living past 100. Planning to live to a certain age is risky, and planning to live to the life expectancy for someone their age will be inadequate for about half of retirees. In theory, retirees want to make sure their money will last a lifetime without cutting back unnecessarily on their lifestyle. In practice, unexpected events may make this very difficult.

Predictability

Long lifetimes are difficult to predict for individuals. It’s easier to predict the percentage of a population with a long life than to predict this for an individual. Wives outlive husbands in most cases.

Managing the Risk

Social Security, traditional pensions and payout annuities all promise to pay an individual a specified amount of income for life. They may also pay income after death to the spouse or other named survivor. Some newer products can help protect retirees against outliving their assets.

Comments

Financial projections can be very useful in retirement planning, but actual experience will differ. All retirees should review their expected income needs and sources at least every few years and adjust spending if necessary.

2.             BUSINESS RISKS

Background

Loss of retirement funds can occur if:

• An employer pension plan sponsor goes out of business.

• An insurer that is providing annuities becomes insolvent.

• Assets held in a participant’s defined contribution plan account lose value.

Predictability

The risk of insolvency for an employer or insurer is closely related to its credit rating in the bond market and, in the case of an insurance company, its claim paying ability rating. Those with top ratings are safest, but  ratings sometimes fall rapidly when business conditions or information changes.

Managing the Risk

Benefits in most defined-benefit private pension plans are insured by the federal Pension Benefit Guaranty Corporation up to certain limits.

Defined contribution plan participants need to diversify investments.

Comments

A pension plan can be terminated even if the employer remains in business.

3.             EMPLOYMENT RISK

Background

Many retirees plan to supplement their income by working at a bridge job part-time or full-time. Today’s jobs often make few physical demands, and may even be done at home.

Predictability

Employment prospects among retirees vary greatly because of demands for different skills, and can change  with health, family or economic conditions.

About half of all retirees retire earlier than planned, often because of job loss or poor health.

Managing the Risk

Retirement plans rarely allow for phased retirement, so a bridge job usually means working for a new employer.

Postponing retirement may be the most powerful way for workers to improve their retirement security. This allows their retirement savings to keep growing while the workers accumulate more benefits from Social Security and retirement programs.

Comments

Retirement planning should not rely heavily on income from a bridge job. Many retirees welcome the chance  to change careers and move into an area with less pay but more job satisfaction, or with fewer demands on their time and energy.

4.             UNEXPECTED HEALTH CARE NEEDS & COSTS

Background

Unexpected health care costs are a major concern. Employers continue to cut back on post-retirement health care benefits. Low-income retirees may spend a large percentage of their resources on health care.

Predictability

Health care costs are:

• Relatively easy to predict for a large group over a limited time.

• Hard to predict for individuals.

• Very hard to predict far into the future.

Managing the Risk

Medicare is the primary source of coverage for post-65 retirees. Supplemental coverage is available from employer plans and individual Medigap policies or HMOs.

Instead of retiring from a job with health benefits, employees may choose to keep working, at least part-time,  in a job that will allow them to remain covered.

Comments

Future resources are hard to predict because a high level of uncertainty exists about the future design of Medicare.

It’s not too late for retirees to reduce their risk of major health problems by lifestyle changes involving diet, exercise, smoking, etc.

5.             DEATH OF A SPOUSE

Background

The death of a spouse is a major change in family situation that is often accompanied by a decline in economic status:

• Some income may stop at the death of a spouse or former spouse.

• The death of a disabled person’s caregiver spouse may bring financial problems at a very difficult time.

• The surviving spouse may not be able or willing to manage the family’s finances.

Inability to cope with a spouse’s death or terminal illness contributes to high rates of depression and suicide among the elderly.

Predictability

It can be difficult to predict which spouse will live longer in individual cases.

Women are widowed more often than men.

Managing the Risk

Many financial vehicles are available and can be used in combination.

Wills and estate planning are important tools to provide for a surviving spouse.

Comments

Some experts say that a surviving spouse needs about 75 percent of the couple’s income to maintain living standards. Widows’ financial resources are very low in many cases. Poverty rates for elderly widows are about 15 percent compared to 4 percent for married couples.

6.             OTHER CHANGE IN MARITAL STATUS

Background

Marriage and divorce can affect benefit entitlement under public and private plans. Some of these effects may not be well understood.

For example, a woman sometimes can maximize her Social Security benefits by first applying as a widow or divorced spouse, later applying at age 70 for benefits credited on her own record as a worker.

Divorce can create major financial problems for either party.

Predictability

A substantial percentage of marriages end in divorce. Many women are alone in retirement.

Divorce or marriage after retirement age is not uncommon and should be recognized as a possibility.

Managing the Risk

This is a personal issue. There are no formal programs.

Comments

In divorce proceedings, retirement benefits may get transferred from one spouse to the other, depending on decisions of the parties and the divorce court.

Couples considering whether or not to marry need better information about how their decision affects benefits from Social Security, Medicaid and retirement or survivor programs.

• At marriage, an individual may gain rights to survivor’s benefits under Social Security and retirement programs.

• Marriage or remarriage may result in the loss of some benefits.

Additional information and research reports may be found at: http://www.soa.org/research/pension/research-post-retirement-needs-and-risks.aspx

Author: Kaynijo

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