For Americans who are able to retire, retirement has always been a period of uncertainty. It is important to plan for retirement and this requires consideration of a range of risks. COVID-19 has taught us a few lessons about these risks:
1. Events we don’t expect can happen and they can have a major impact on both our daily lives and long-standing plans.
2. One development can trigger multiple consequences. COVID-19 has put pressure on and led to changes in health care delivery, changed the way we lead our daily lives during the pandemic, and led to large scale unemployment and layoffs, as well as a decline in consumer spending and confidence, and major fluctuations in investment markets.
3. As we think about retirement, we should pay attention to the wide range of retirement risks and plan for ways to manage them.
4. The short-term can feel overwhelming and crowd out attention to the longer-term. But current short-term developments make it even more important to think about and pay attention to the long-term because current developments increase the chances of people running out of money in retirement.
5. If we don’t handle the short-term responsibly, it may be virtually impossible to manage in the long-term.
The Society of Actuaries (SOA) has just published Managing Post-Retirement Risks: Strategies for a Secure Retirement. This guide provides a discussion of thirteen risks retirees face during retirement. The risks are presented in three main categories and the individual risks are discussed further in sections that define each risk and provides ideas on how to manage them. Some of these are very familiar and considered in nearly all retirement plans, and some are much less familiar and often forgotten. This article focuses more on some of the risks that are commonly left out of planning. The three main categories of risks in the SOA guide are economic risks, personal planning considerations, and unexpected/unpredictable events.
The long vs. the short-term
The 13 risks are all long-term. But before a satisfactory long-term plan can be put into place, adequate provisions are needed for the short-term. And the key to short-term security is an adequate emergency fund. Views on how much is needed for an emergency fund are changing and where in the past it was felt that it should be three months, today there is discussion of the need for six to twelve months cash flow. The second step in a good short-term plan is to keep spending and debt under control. This includes avoiding expensive debt and having sufficient health and disability insurance. This also includes having a realistic idea of what spending needs are versus what wants are – something many people do not actually know. With these steps in place, one can focus on the longer-term.
Risk category: Economic risks
The four economic risks discussed in the guide are inflation, interest rates, financial markets and business continuity. The first three are normally considered in planning, but the potential for bankruptcy and business problems may not be. Some financial arrangements are subject to third party guarantees. For example, private sector defined benefit pensions, insurance and bank accounts may be guaranteed by various government agencies. It is helpful to understand what is guaranteed and what is not. If an employer has financial problems and/or goes bankrupt, that can mean both job loss and loss of benefits (including health insurance), and loss in the value of employer stock.
Risk category: Personal planning considerations
These risks include longevity, post-retirement employment, changes in housing and support needs, death of a spouse or partner, and changes in marital status by divorce or separation from a spouse or partner. Several of these risks may be overlooked in retirement planning. Longevity is usually considered, but what may be overlooked is that half of people live beyond the average life expectancy. For couples it is important to consider that income is needed for the rest of life of the second to die.
Many people expect to retire later than they actually do and some expect to continue working and earning some income post-retirement. It is important to be realistic and not overly optimistic about income from continued work, and to test various scenarios for retirement age. A plan that will look very good if one retires at age 65 may not work at all if retirement is at age 62, especially since Medicare coverage is not available until age 65.
Housing is a very important lifestyle, financial and support issue in retirement. It is the largest asset in many households and the largest element of expense for the vast majority of retirees. Housing choices determine access to family, a variety of services and activities, and also access to support, which is sometimes integrated with housing. Housing should be explicitly considered in planning when one is close to or at retirement age. Considerations should include affordability, paying off or refinancing a mortgage, and reverse mortgages. And one should recognize that needs and suitability change as people develop limitations and need more support.
It is common to consider death in planning, but not so common to consider the contingency of divorce. Divorce at higher ages splits assets and Society of Actuaries research found that it is a financial challenge that many people do not recover from. It is important for both parties to seek professional advice in a divorce or separation situation.
Risk category: Unexpected/unpredictable events
These risks include public policy changes, significant healthcare needs, unforeseen needs of family members, and bad advice, fraud and theft. Except for health care, these are risks that easily can be forgotten in planning. The caution with regard to health care is to be careful about the choice of insurance approach and networks. In the time of COVID-19, it may not be possible to control where one gets care, and care could easily end up out-of-network.
Unforeseen needs of family members are very important. Some households help other family members when help is needed, either regularly or periodically over their retirement. It is important to include allowance for such help in the plan and understand what is affordable,
Care is needed to minimize the risk of bad advice, fraud and theft. Interestingly. SOA research has consistently shown that most retirees and pre-retirees are not that concerned about this risk.
The SOA offers a series of decision briefs to help with specific retirement decisions. They are designed for people nearing or in retirement. Each of the twelve briefs addresses a specific issue in retirement and provides resources for a retiree to learn more.
There are a wide variety of retirement risks. It is easy to forget or minimize some of them when planning and it is also easy not to focus on a broad range of solutions. I encourage people to use the Society of Actuaries guide as a way to identify and include the risks that may be left out or not considered enough as they develop and update their longer-term retirement plans.