Research
Research Studies in Pension
Post–Retirement Risks: Changing Needs and Resources Executive Summary
Retirement planning has two distinct phases: accumulating resources before retirement and managing them in retirement. Until recent years, such resources were largely in the form of a regular lifetime income for retirees to live on. The challenge is greater today, with more and more assets leaving retirement plans as lump sums and getting rolled into Individual Retirement Accounts for individuals to manage themselves.
To consider the wider range of needs and risks now facing Americans during retirement, some members of the Society of Actuaries (SOA) have formed a committee to work with other professionals from several disciplines.
- Post–Retirement Risks: Changing Needs and Resources Chart (PRRC)
- as summarized below and presented in full in the SOA Web site.
- Longevity of individuals has always been a major unknown. Because nobody can say how long the money must last, managing and investing one's own nest egg during retirement is difficult. Payout annuities are a way to remove much of the financial uncertainty due to longevity.
- Economic unknowns are also a big concern for retirees.
- Inflation has been low in recent years, but over time even low rates of inflation can take a big bite from the buying power of a fixed income. Pension checks from Social Security and other government programs have automatic inflation protection, unlike most private pensions.
- Interest rates have fallen to historical lows–bad news for many conservative investors who want to avoid the ups and downs of the stock market. The low rates give less spendable income to owners of certificates of deposit or money market funds, and hold down income from newly purchased long–term bonds or payout annuities. But retirees who made such long–term investments earlier when rates were up are staying well ahead of inflation.
- Stock market returns are especially volatile. Retirees should limit their exposure to stock market losses and diversify among different classes of stocks. Heavy commitment to the stock of a former employer is a common error that proved costly to some people in recent years. Still, common stocks have outperformed other investments over the long run despite periods of bad experience.
- Business conditions can easily get worse, hurting retirees several ways:
- Part–time or consulting work to supplement pension income may disappear when employers' budgets are tight
- Insurance companies that issue annuities or health insurance may become insolvent. State guaranty funds protect individuals from loss in many cases.
- Traditional pension plans may become too costly for employers to continue. The Pension Benefit Guaranty Corporation protects benefits in terminated plans up to certain limits, but benefits for highly paid former employees may be at risk.
- Public policy is subject to adverse changes over time.
- Tax rates and formulas, especially for income and real estate taxes, are not guaranteed against unpleasant changes.
- Social Security will have to be overhauled in the years ahead. Existing retirees are likely to be protected from any benefit reductions.
- Medicare costs are rising rapidly, with insolvency looming ahead, yet many proposals would expand benefits to cover prescription drugs. If costs can't be controlled, retirees are likely to pay higher premiums or higher taxes to support the program.
- Ability to live independently often dwindles for the oldest retirees. They may need to pay for special housing, care facilities, or assistance with daily living activities. Help can come from family, savings, long–term care insurance, or the Medicaid program.
- Consumer information and assistance is often lacking to help retirees deal with problems of aging. They could use more knowledge of finances and living arrangements, and later may need help with routine decisions and bill–paying.