23 Oct. 2013 | Comments (0)
This blog post follows up the earlier post on New Insights on How People Retire. It offers further findings from the Society of Actuaries focus group study, The Decision to Retire and Post-Retirement Financial Strategies. As mentioned in the earlier post, these were focus groups of middle market American retirees.
Social Security claiming decisions:
For these individuals, Social Security is a very important part of their income. Monthly Social Security retirement benefits are 75% greater if claimed at age 70 rather than at age 62. Related spouses and survivor benefits also increase. The actuarial value of the benefits is also greater at the higher claiming ages, and later claiming is a good deal for those who live to higher ages. However, most of the participants claimed Social Security at age 62, and they commonly did a simplified type of “break-even” analysis. This frames the claiming decision in terms of how long people must live to “break-even” if they claim later.
Such an analysis generally ignores longevity risk, inflation and spousal benefits and results in an adverse result for people who live longer than the actuarial tables indicated as their expected average lifetime. Employers can help by encouraging people to evaluate the options.
Financial management in retirement:
“My main concern is the expenses I have no control over. In the past year, my long-term care insurance, my taxes, my homeowners have all gone up. I can’t do anything about that.” Male, Chicago
Many of the focus group participants showed common behaviors and actions:
• Participants were very aware of their regular income and expenses, and they managed expenses based on their estimated daily expenses. They are very resilient and adaptable with regard to spending decisions and reduce spending when needed. They are accustomed to making trade-offs when necessary.
• The major strategy for managing their assets is to preserve them. Most did not have a plan to systematically withdraw assets from their retirement accounts. Those who had reached age 70½ use the legally mandated Required Minimum Distribution rules to withdraw funds from their Individual Retirement Accounts. They did not necessarily think much about volatility and some had more assets now than when they retired.
• Some manage their assets using “dual asset accounts” and have a “slush fund” for discretionary spending. The balance in the second fund lets them know how much money they can spend on travel and other discretionary items.
• Most own their homes, have paid off their mortgage, and appear to be very careful about debt. They had no interest in using a loan or reverse mortgage to access the equity in their home. It does not appear that they have large credit card balances. The findings about debt are different from other findings that indicate that many people are entering retirement with debt.
• The focus groups offered no evidence of retirees spending significant parts of their assets on luxury items, such as boats or RVs. The retirees do make choices about current spending and a number report reducing the amount they travel and foregoing other discretionary spending when necessary.
People want to hold on to their homes and home equity as long as possible. They generally plan to stay in their homes, but some plan to downsize.
This research, like other SOA research, showed a relatively short planning horizon and very little longer term planning. Employers have an opportunity to help employees and retirees with planning tools and support. We learned in the study that:
• Planning is focused on expected cash flow in the current year. Participants generally did not consider inflation nor did they factor it into their plans.
• As shown in other research, there are gaps in knowledge about longevity as evidenced by their short term planning horizons.
• The focus group members for the most part do not explicitly plan for shocks and longer term risks. Their risk management strategies appear to be asset preservation, limiting debt, and controlling spending.
• Many of the focus group members have not made longer term calculations to manage their retirement. Some use investment brokers, financial planners or advisors, and those who do use professional support reported getting value from the help they received..
Family is an important factor in their retirement. Participants have helped and are still helping family members. However, they want to be independent and do not intend to rely on family if they need help themselves.
Most of the respondents were generally satisfied with the retirement decisions they made. Some would have preferred to work longer. There was significant variation with how satisfied they were with their life in retirement. Some were lonely, particularly widows. However, they found a value in freedom and stated that their decisions were based on more than just finances.
Summary: The Focus Groups paint a picture of these retirees who appear to be “resource-constrained” as careful and conservative financial managers in the short term with a focus on current cash flows rather than on shocks and changes over time. They are quite flexible and able to reduce current spending to match their current income. They are reluctant to draw down assets, saving them for emergencies, shocks or an inheritance.They limit what they spend for travel and meeting their dreams. They do not plan for significant inflation, substantial long term care needs, and large unexpected medical expenses. Very few are using insurance products to manage these risks. While some get formal financial advice, many manage their assets on their own.
Given current longevity, it is quite likely that a considerable number of them will struggle in later years. While working longer is widely cited as a method to help people be more secure, for many this might not be a practical solution because of factors such as health problems or lack of job opportunities. Employers can help by offering more job options and encouragement as well as planning support and tools.
The results leave a major question for employers to consider: How can these findings be used to better guide and assist retirees?
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The Society of Actuaries (SOA) Committee on Post-Retirement Needs and Risks has been working to improve the management of the post-retirement period for about 15 years. As part of that work, it has studied how middle market Americans (generally those with less than $500,000 of net worth) make decisions about retirement and how they deal with key financial risks after retirement. The SOA uses these results to help improve retirement security and the systems that support it. Results of research are communicated to the public, actuaries and others in an effort to help the public achieve a higher level of financial security.