Everyone who is retired and those who are approaching retirement need to understand the importance of “the science of risk management” and how the emerging risks that are present in retirement could be catastrophic if not planned for and taken into account. The time to do something about risk is before a crisis develops when there is time to prepare for the worst case scenario.
For investors, the risk is about the probability of losing money, so planning for the unexpected should also be considered. “How much could I lose in a really bad year”? I think that most investors were totally unprepared for what happened in 2008 and now have learned that there are severe consequences if things don’t go according to plan and you don’t have your risk covered.
There are six major risk factors facing those who are in retirement. They should all be carefully planned for before retirement because it is more efficient and easier to manage than to have to solve the problems after retirement takes place. And if one waits too late, it is even likely to become impossible to manage some of the risks as one reaches older ages. Procrastination is extremely costly almost without exception. And ignorance is no excuse. The time for solving risk problems is today.
Today we are going to focus on the number one worry the majority of retirees have today. That risk is LONGEVITY RISK or the fear of outliving your money. Planning to live to a certain age is risky and planning to live to the life expectancy will be inadequate for about 50% of the population. Retirees want to make sure their money will last a lifetime without changing their lifestyle. In reality, however, unexpected events make this very hard to accomplish.
So how long do we have to worry about? It’s hard to say because we are all individuals and the life expectancy numbers are based on averages. But at least they give us some idea of what we need to plan for. Let’s look at the numbers.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Likelihood that
xxxxxMale Currently Age 60xxxxxxxxxxxxxAllocated Pension will be depleted
1 in 20 chance of dying before age 66 xxxxx 0% chance of fund being depleted
1 in 4 chance of dying before age 78 xxxxx .5% chance of fund being depleted
1 in 2 chance of dying before age 86 xxxxx 46% chance of fund being depleted
3 in 4 chance of dying before age 92 xxxxx 80% chance of fund being depleted
19 in 20 chance of dying before age 100 xxxx 93% chance of fund being depleted
You can see that LONGEVITY RISK is a real problem. The meltdown of retirement accounts, rising medical costs, uncertain entitlement programs and higher taxes have added to the risk. Facing 30 years of retirement living on past savings and Social Security is a scary reality.
Consider what some are going through now and what they are saying. Edie Stark is a retired nurse and is age 84. She and her husband lost 50% of their retirement assets since the stock market tanked. “I have fixed expenses so I can add it up and tell you how many years we can live unless the market comes up”, said Stark. “We wanted to have money to leave our children. That’s not possible anymore.”
Dorie Ryder, 89, a retired school teacher and neighbor of Stark has lost about 25% of her assets due to the stock market decline. “I just do the best I can and I’m worried. I don’t know how long I’ll be able to stay here.” Coping with financial fears is not unique to the elderly but it is especially painful to the elderly. “Money anxiety when you’re older is just different than when you are young. You don’t have a chance to recover.”
“I predict that this spike in anxiety around the security of money is actually going to lead to more sickness. People are going to die of worry.” Experts say millions of middle-and-upper class retirees across the country face mounting insecurity due to exposure to stocks instead of ‘safe money’ investments like short-term bonds and fixed annuities.
The US is the only developed, industrialized and democratic country in the world where traditional pension plans with a nearly guaranteed stream of income are being replaced by 401k plans in which retirees bear many risks from volatile market investments. “It’s disastrous” says Alicia Munnell, director of the Center for Retirement Research at Boston College, referring to the outlook for retiring or soon-to-be “baby boomers.”
Late boomers will fare far worse than their parents and grandparents in terms of replacing their income in retirement, mainly because of the erosion in the employer pension system. The idea that we have people increasingly and solely dependent on accounts which vary with the ups and downs of the stock market just doesn’t make for a very sensible retirement arrangement.”
In addition to the meltdown of retirement assets, there is also rising medical costs. This is a very real worry. What heavily contributes to running out of money when it does happen is that unexpected events occur: like a major sickness that becomes chronic. Not only can it be very expensive to treat but chronic conditions that lead to supplemental care over long periods of time can wipe you out.
If that were not enough, you also have inflation and taxes to be concerned about because they both erode your purchasing power and dilute your savings. And the entitlement programs we have now like Medicare and Social Security are not on sound footings and have to be restructured in a few years if they are to be sustained. How this will effect your situation is unknown at this point in time.
These major risk factors are what make up LONGEVITY RISK. Managing the risk factors is critical to our knowing that we have security and will always have money for as long as we live.
The major risk factors are: Investment Risk, Health-care Risk, Long-term Care Risk, Inflation Risk, Entitlement Risk, and Tax Risk. We will be discussing each one of these in detail over the coming weeks.
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