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The age-old concern among retirees and near-retirees is
looming large these days—that of outliving retirement savings.
As 78 million baby boomers grow closer to retirement, they
and current retirees are feeling the squeeze of inflation. And they’re
wondering if their nest eggs will keep up with soaring prices, pay for
healthcare and long-term care, if needed, and help them maintain their desired
standard of living after a spouse dies.
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. And grappling with the effects of inflation is as difficult
as ever for retirees and near-retirees.
“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.”
Complicating the situation is an otherwise positive fact:
longer life expectancy for retirees. Among the current 65-and-older population,
average life expectancy for American men and women is 17 and 20 years, respectively.
Thirty 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 beginning at later ages, such as 75 or 80.
The survey also revealed that retirees and near-retirees are
concerned about their ability to afford long-term care. To manage this risk,
actuarial approaches include personal health and wellness commitments and
long-term care insurance, which helps pay for the cost of seniors with care
needs.
Adequate healthcare is another concern. Should a
catastrophic illness occur, medical costs for an over-65 retired couple not
covered by Medicare could 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.
The study showed that women are more concerned than men that
inflation will significantly impact their retirement resources. Such concerns
may be magnified for women whose husbands have died.
“Women are more adversely affected by inflation than men
because of their longer life expectancy,” Rappaport said. “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.”
To manage these risks, actuarial approaches include
investment strategies to produce income, including joint and survivor annuities
and life insurance.
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 using 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.
To identify, understand, and manage the retirement risks
facing retirees and near-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
for release later this year.
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