February 2012

Perspectives from Anna: Focusing on Retirement Decisions

By Anna M. Rappaport


Each year the Committee on Post-Retirement Needs and Risks discusses what topics are most important as we seek to understand and manage post-retirement risk better. Two years ago we focused on the importance of decisions at the time of retirement. The committee determined that there are many decisions people need to make, they are overlapping and often quite difficult. Even people who have done a lot of planning and given a lot of thought to what to do are faced with trade-offs and complexity in making decisions. Most depend on personal situations and choices and have no "right answers."

The committee established a workgroup to determine how best to address this issue, and that group decided to do 11 decision briefs , each one laying out a decision area and offering key considerations to help individuals plan for retirement. This article provides a description of the project scope and parameters, a brief overview of the 11 areas, including some examples of the issues that are complex or involve trade-offs, and also requests help from every actuary reading the article.

Project scope and parameters

As we developed the project, we selected topics that we thought would be of interest and importance to many people. We focused on the middle market, and although we have included a brief on estate planning, we did not focus on issues of interest only to high net worth individuals. The briefs are designed to be useful to thoughtful individuals who seek out information to help them make decisions. They are also designed to be helpful to financial advisors, and other professionals like lawyers and accountants.

The volunteers serving on the workgroup developed the content and wrote drafts. We then were faced with a challenge. We tested an initial draft with a small group outside the profession to see if it was useful. We got back very enthusiastic comments about the information but many comments and concerns about the specifics. We recognized that the scope of this project was far beyond what we usually do, and that it was important. Our research as well as that of others consistently showed that there are knowledge gaps and planning gaps. If we wanted to make the project useful to the public, we were faced with a challenge, and took a new route for the work of the Committee on Post-Retirement Needs and Risks. We engaged a very experienced retirement trends writer/editor to help us define more specific project parameters and rewrite the material. With her help, we decided to make this primarily a Web based project, but with PDFs that also will be printed. We set a length limit for each decision brief of 2500 words, and used readability indexes to test the writing. The readability index gave us a quantitative way to judge the writing and make sure it would work for our audience. We used a common format.

Topics for the briefs and why chosen

The topics for the briefs are as follows:

  • Deciding when to retire–focuses on the considerations involved in the decision about when to retire. This brief starts with the key questions that need to be considered.
  • Dealing with unplanned early retirement–plans are often turned upside down by unplanned early retirement.
  • Special issues for women nearing retirement–women live longer and are likely to spend time as widows.
  • Social Security claiming–focuses on how to decide when to claim Social Security and the impact of the claiming decision. It provides examples and focuses on the special issues for couples.
  • Methods of generating retirement income–replacing a paycheck is a key decision and the options involve major trade-offs. This brief includes discussion of range of choices, and explains the different types of products available.
  • Asset allocation–for those with significant financial assets, a major and very important decision.
  • Decisions related to health insurance–Medicare provides coverage to those over age 65, but there are still significant decisions and choices to be made, since Medicare links to marketplace options and supplements can be added. The brief also reviews the challenges for early retirees.
  • Planning for long-term care financing–long-term care is a huge risk, often not planned for, and even though many people do not realize it, not covered by Medicare. Buying insurance is one option and the brief helps explore that decision.
  • Housing considerations–this is a huge lifestyle and financial decision of major importance. This brief balances financial and other issues and discusses key financial decisions and options related to housing, including special elderly housing.
  • Estate planning–estate planning is not just for the wealthy, and there are key issues of importance to everyone.
  • How to find reliable financial advice–middle market individuals who want advice do not always have good sources to turn to. It is important to understand the types of options.

SOA research showed that for mass middle households age 55-64, non-financial assets are 70 percent of their net worth at the median. (Net worth excludes the value of Social Security and any defined benefit pensions.) For many of these households, the most important retirement decisions are when to claim Social Security and when to retire, so that these decision briefs are critical. It is also interesting to note that much retirement planning software is focused on asset accumulation and it often does not address the issues of most concern this group. The issues surrounding housing are extremely important, and involve financial implications which are not always expected. This brief raises issues rather than providing answers, but at least it helps to the get the questions on the table.

SOA research also showed that systematic risk management and purchase of financial products are not the most favored strategies for dealing with risk, except for purchase of health insurance. Three briefs provide information to help people think through the use of financial products and make decisions about whether they would be wise to purchase products of these types. They also provide background that should be helpful in the process of shopping for and comparing such products. These products are in the area of income generating products, long-term care coverage and health benefit coverage.

As we did this work, we recognized that there are various timing issues and constraints involved in each of these decisions. Some are irrevocable and some can be changed later, but possibility at a cost. In some situations, such as the purchase of long-term care insurance, there is no specific time constraint, but the price goes up as one ages. Also, if health status deteriorates, long-term care insurance may not be available. In the case of unplanned early retirement, the decision is not voluntary. The SOA CPRNR has tried in the past to make a flow chart outlining decisions, but the paths vary by individual and this is a task that remains for the future.

The briefs do not provide advice, but it is hoped that they will help people make better decisions. They do provide hints about traps and pitfalls.

A few highlights

Some favorite quotes from the briefs are as follows:

"Reminder: There is no right or wrong answer for everyone. Each person has unique needs, circumstances and retirement goals. A good strategy is to use these questions to spur ideas that fit the specific situation."

"Where to live in retirement can be a lifestyle decision, a financial decision or a health care decision. Even people who are able to remain in their long-time homes have a lot of decisions to make."

"Key Questions for Retirees: The key questions for those who are considering income products with guarantees are: 1. What type of annuities or other products with guarantees to buy? 2. What amounts of guaranteed products to purchase? 3. What is the best time to purchase an income product?"

"Where's My Paycheck? That is a common question for new retirees and near retirees when they start mapping out the retirement journey ahead."

"What-ifs can help: Discussions about housing can be awkward and difficult, but "what if" discussions with a financial planner or adult children may help to establish a rational planning process."

"Social Security planning for couples should be based on joint life expectancy, and delaying Social Security can yield even bigger benefits than for single people. Couples may also benefit from coordinated strategies; for example, one partner could delay claiming as long as possible while the other partner could begin benefits as early as possible."

We hope that these quotes will spark your curiosity and that you will seek out the briefs.

We need your help and we encourage further work

The decision briefs are designed to be helpful to individuals nearing or at retirement age, and to their advisors. Benefit plan sponsors often do not wish to give advice to employees, but are willing to provide information about useful resources, particularly when they are neutral and do not promote any specific products. We are asking those actuaries who advise plan sponsors to look at the briefs and see if they think they will be valuable to their employer plan sponsor clients as information for employees. If so, let them know about these briefs. They can be downloaded and there is no charge to use them.

As we worked on the decision briefs, we also encountered situations where there are not well established answers and where there are differences of opinion about the right path. For example, there is no agreement about the amount that should/can be reasonably withdrawn from an investment account each year when one chooses not to annuitize. One recent author has focused on two percent rather than the traditional four percent. And there are varying opinions about the trade-offs in annuities. There is also no clear path about the right way to analyze the risks involved in moving to a Continuing Care Retirement Community with a significant initial payment. The briefs do the best we can with our knowledge today to lay out the issues. We challenge each of you to think about these areas where more can be done to analyze retirement risks and provide good tools to help individuals move forward.

We also welcome feedback. Feedback can be sent to ssiegel@soa.org or to anna@annarappaport.com.

Anna Rappaport serves as chairperson of the Committee on Post-Retirement Needs and Risks.