June 2012

Perspectives from Anna: Focus on Post – Retirement Risk Update on Society of Actuaries Activities

By Anna Rappaport

I chair the Society of Actuaries Committee on Post-Retirement Needs and Risks and am proud of its 15 years of research and reports. This column provides an update on some new partnerships and recent projects, and an overview of the committee’s accumulated body of work. It also offers some personal perspectives. The research reports, Decision Briefs and papers reflecting the work of the committee can be found on the Post Retirement Needs and Risks web page.

Our work started in the mid/late 1990s out of a concern that not enough attention was being paid to what happened to people and their money after retirement. At that time, it seemed that nearly all of the focus on retirement planning was on how much money to save—and how to save it—and not on how that money would ultimately be used. The good news is that today more people are paying attention to the latter, but as luck would have it, the challenges with regard to the former are greater, as many employers have terminated or frozen their defined benefit plans, put the brakes on their company match of defined contribution plans and reduced their support for retiree health benefits.

The economic fluctuations of the last decade have increased the need for individuals to take a greater responsibility for managing their own retirement planning. Working longer can help those who have not saved enough, but nearly half of working Americans retire earlier than planned, often due to job loss, illness or family members needing care. Along the way, we learned that for many middle class Americans, investments in housing were a major part of their assets (excluding the value of occupational defined benefit plans and Social Security) as they neared retirement. To further compound the challenges for some, the recent downturn in residential real estate served to further jeopardize their prospects for retirement income security. So, it seems that our work continues to take on ever greater importance and more people seem to be paying attention to it.

My personal goal is for our work to make the world a better place. I want to make a difference and this goal is shared by the many people contributing to the work of the committee.

Our major on-going work is the Society of Actuaries Post-Retirement Risk Survey. This survey focuses on how Americans nearing retirement and those who are already retired view post-retirement risk. As far as we know, it is the only ongoing survey focused on the post-retirement period. Surveys are conducted every two years and combine repeated questions with major new areas of emphasis, chosen for each survey based on current conditions. The project oversight group for each survey selects topics based on what they view as most important and not already covered well elsewhere. Special reports are issued, as deemed appropriate, on these major new areas of emphasis. For the 2011 survey, for example, the special areas of emphasis were the understanding of longevity risk, working in retirement, and the impact of the economy on those nearing and at retirement. Reports on these issues are being released in 2012.

We have had several interesting projects in the past year:

Our work has taught us that there are gaps in knowledge about post-retirement risk. We have also learned as we look around in the broader world that financial literacy is a huge problem. Scientific thinking has shifted from expecting that decisions are made on a rational economic basis, to focusing on understanding other ways that people make financial decisions. Behavioral finance studies such decision making. We are now partnering with the Rand Behavioral Finance Forum to increase our understanding of how people make retirement decisions. This partnership gives us access to some different research data and the potential to test out ideas about financial decision making in general, and retirement-based financial decision-making in particular. Actuaries—whether interested in retirement or any other financially-based area of practice (i.e. all of you)—should check out their web page.

One of the topics we have been exploring with other partners is, unsubtly titled, “Running out of Money.” We took a different approach in exploring this topic. We partnered with the Urban Institute and the Women’s Institute for a Secure Retirement (WISER). The three organizations gathered a small group of about 15 researchers and experts in program implementation to share insights. The members of the group provided a number of studies and advance reading, and then discussed the key issues and concerns. Some of the discussion was provocative. We will be preparing a report referencing the key information provided and the discussions from the roundtable. The report should be available later this year.

Another topic we have been working on is the “Middle Market” (for those who are not from financial service companies, that means the “Middle Classes.”) Some of us believe that our work should be heavily focused on the middle classes. People at the lower end of the economic spectrum rely primarily on public programs, and there is not much we can do that will affect them. (Public policy input from the actuarial profession comes from the American Academy of Actuaries, and not from our work.) At the other extreme, those people who have a lot of wealth are primarily concerned with wealth preservation and tax management. Addressing such issues is outside of the scope of most of what we do. It is the middle class who are trying to arrange a decent retirement for themselves in the face of constrained resources, trade-offs and difficult choices. It is this class we hope to benefit, whether helping people directly as they think through issues, or offering ideas for products or approaches, or providing their individual and communal advisers with useful and important information. Our earlier studies, Segmenting the Middle Market, Parts I and II, provided insights and some discussion of key issues and possible areas for strategies. These can be found on the committee web page.

This last project was started in 2011 and builds, to a large extent, on the above themes. Our partners are the Financial Planning Association and the International Foundation for Retirement Education (InFRE), and we are trying to learn how planners approach retirement planning for the middle market and how what they do differs from what they do for those with more money. The Financial Planning Association surveyed its members, and we are working together on focus groups to learn from planners. The report from this project should also be out later this year and will include results of the survey and focus groups.

We are also addressing the middle market through a separate project: Segmenting the Middle Market – Part I will be updated using 2010 Survey of Consumer Finances data when it becomes available later this year. The original work on Segmenting the Middle Market used the 2004 SCF data base. Another group is looking into the relevance and possible context of a further project on the middle market.

Finally (well, almost), another project in process is a study of Blended Families, and how they view retirement risks. Here we are partnering with the MetLife Mature Market Institute. For the last decade, we have looked at how the public views post-retirement risks. This work will take that research in a new direction and help us understand how differences in family types affect retirement security and risk management. Families are an important part of long-term security, but does it matter that many are second or later marriages, or not married at all, and that children may be from prior marriages? This study will hopefully provide new insights and raise new questions for further investigation.

Several other projects completed in the last year were also very important. The 11 Decision Briefs released in January 2012 represented our biggest project to date. They respond to our research and bring together many ideas to help individuals make better retirement (both pre and post) decisions. This project was a major step forward in making the work of the committee useful to the general public and to those who advise them.

We also updated Managing Post-Retirement Risks in 2011. This is the third edition of the “post-retirement risk chart,” and it offers to users an identification of risks, a very general inventory of management strategies, and comments.

At the 2011 SOA Annual Meeting, the papers prepared in response to the Call for Papers on Retirement Security in the New Economy were presented. The monograph is available online.

We are delighted to have the opportunity to enter into new partnerships, and to expand both the intensity as well as the scope of our work. We are also very pleased with the many volunteers—both actuaries and colleagues from outside of the profession—who participate in our projects. Some of the volunteers have been with us for many years, and others have joined their first project group in the last year or two. Our work benefits greatly from having multi-disciplinary project groups reflecting a range of professional and personal perspectives. I am very pleased to be part of this effort and truly feel that we are contributing value to Americans, to the global retirement community and to the actuarial profession.