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06 Feb. 2012 | Comments (0)

Introduction

Many employers have shifted away from defined benefit pension plans and are now asking employees to take more responsibility for their retirement.  At the same time, they provide information and education to help with that job.  This article is about resources that can help people understand the key challenges related to retirement decisions.  The audience for this information is individuals within 10 years of retirement age, and those organizations that help them secure information. The  goals of the briefs are to identify questions and challenges, not to provide specific advice, and not to recommend specific products.  They are written to explain trade-offs and options.

For the last 15 years, the Society of Actuaries has been focused on understanding and studying post-retirement risks.  The trend to defined contribution pension plans (DC) with lump sums as the normal method plan distribution has made this particularly important. The Society of Actuaries Committee on Post-Retirement Needs and Risks (CPRNR) identifies projects each year to further the study of these risks and help advance their management. Examples of the risks studied include investment risks related to stock and bond markets, risks related to health care costs or the need for long-term care, and risks related to dying early or living a long life.

The CPRNR is multi-disciplinary. One of the CPRNR goals has been to encourage participation from both actuaries and members of other professions that deal with retirement issues. Today the group numbers over 100, about half of whom are actuaries with others including economists, sociologists, psychologists, public policy specialists, and even an anthropologist.

The CRPNR produces a variety of special studies and recurring reports, which can be accessed at (http://www.soa.org/research/research-projects/pension/research-post-retirement-needs-and-risks.aspx )The Highlights document listed down the page includes the main studies.) The main recurring project is the Post-Retirement Risk Survey, which has been carried out every other year since 2001. (http://www.soa.org/files/pdf/research-2009-retire-risk-survey.pdfLINK) The group has also produced Managing Post-Retirement Risks—A Guide to Retirement Planning, which addresses 15 different risks that retirees face. (http://www.soa.org/files/pdf/post-retirement-charts.pdf) This guide, known as the "risk chart" provides a single-page discussion on each of the risks covered, including topics like "predictability" and tips on managing the risk. The guide can be a valuable tool for individual who want to make sure they are addressing the full range of retirement risks and for employers providing workshops or support for the retirement planning process.

Decisions at the Time of Retirement

Two years ago the CPRNR identified the need to make decisions at retirement as a major challenge for individuals, particularly in light of the move to a more DC focused system. In response, the CPRNR  launched its most ambitious project, involving the production of 11 Decision Briefs on important decisions that individuals need to make around the time of retirement. Each of the briefs deals with a specific decision area and offers key considerations to help individuals plan for retirement. The committee observed that the time around retirement is particularly challenging, not only because of the life changes, but also because of the number of decisions that must be dealt with. The Committee felt that it could provide useful information for both individuals contemplating retirement, and for professionals, like accountants, lawyers, and investment advisors, who work with such individuals. The Committee  recognized that individual decisions depend on unique personal characteristics, but we felt that we could offer useful general information.  The briefs are United States (US) focused and based on the US environment.  However, many of the same issues affect people in other countries as well.  

The briefs are focused on the issues facing average Americans and they do not deal specifically with issues that are only important to high-income individuals. Some of the decisions involve major trade-offs and the briefs emphasize these trade-offs and are designed to offer a balance approach. The briefs can be found at http://www.soa.org/research/research-projects/pension/research-managing-retirement-decisions.aspx

Topics for the Briefs

  • Big Question: When Should I Retire?
  • When Retirement Comes Too Soon
  • Women Take the Wheel: Destination Retirement
  • Deciding When to Claim Social Security
  • Designing a Monthly Paycheck for Retirement
  • Treating Asset Allocation Like a Roadmap
  • Securing Health Insurance for the Retirement Journey
  • Taking the Long-Term Care Journey
  • Where to Live in Retirement
  • Estate Planning: Preparing for End of Life
  • Finding Trustworthy Financial Advice for Retirement and Avoiding Pitfalls

Fitting the Pieces Together: Creating an Integrated Whole

Although written as 11 separate Decision Briefs, these pieces are intended to flow in a logical sequence as reflected in the ordering of the above list. This section provides examples of  the issues discussed in the briefs and notes which may apply broadly and which are primarily US focused.

The first Decision Brief addresses The Big Question: When Should I Retire? There are a host of financial and non-financial issues to take into account. On the financial side, this brief emphasizes the impacts of increases in longevity leading to longer retirements. In 1950 the average length of retirement was eight years; today it's close to 20 years.  The brief provides examples to show the financial impact of working longer. Delaying retirement by four years can increase the annual income available to support retirement by as much as 33 percent. Given the increases in longevity and uncertain financial markets, it may be a good idea for individuals contemplating retirement, to consider the impact of working a few more years.   However, research indicates that many people do not understand the impact of working longer of evaluate it.

Another  Decision Brief deals with the important issue of Deciding When to Claim Social Security. In the U.S., many individuals elect to begin Social Security at the earliest eligible age of 62 without considering the increased individual and survivor benefits they could obtain by delaying. For middle income retirees, Social Security provides bulk of retirement income—on average about 70%--so it is important that claiming decisions be made carefully to make the most out of this income source.

The Decision Brief, Women Take the Wheel: Destination Retirement rounds out the set of briefs that address decisions about the retirement process. For a variety of reasons, women generally reach retirement with lower savings than men, and therefore face greater challenges in financing retirement.

The briefs help the reader consider sources of retirement income in addition to Social Security. Two of the briefs—Designing a Monthly Paycheck for Retirement and Treating Asset Allocation Like a Roadmap–deal with issues related to the topics of product allocation and asset allocation. The choice of products for retirement involves deciding what portion of retirement savings to allocate to products with guarantees, like annuities, versus regular investments without guarantees like stocks and bonds. The most basic asset allocation question is how to apportion those funds held in regular investments among stocks, bonds, and other alternatives.

Individuals also need to deal with risks they will face in retirement involving health care and long-term care.  The Decision Brief on Securing Health Insurance for the Retirement Journey discusses the health care funding decisions. Although Medicare provides basic medical and hospital coverage for those age 65 and over, deductibles and coinsurance can give rise to big out-of-pocket costs, so most individuals also purchase Medicare Supplement or Medicare Advantage policies to cover more of the costs. There are also optional Medicare Part D prescription drug coverages that are offered by private companies.

Taking the Long-Term Care Journey examines the potential need for long-term care and how to finance it.  In the U.S., Medicare only covers long-term care costs on a very limited basis, so individuals bear the cost of care themselves unless they exhaust their savings and then rely on the Medicaid. For those who want to protect assets for personal use or for heirs, it may make sense to consider purchasing long-term care insurance. Purchasing this form of insurance involves a number of menu choices about such items as waiting periods, benefit periods, levels of coverage, types of coverage, and inflation protection. It is advisable to work with a long-term care insurance specialist in sorting out these choices.  For employers offering long term care insurance on a group basis, this is valuable background.  And in any case it is helpful information. 

Estate Planning is not just for rich people, and all individuals should get the basics in place, like having appropriate wills, health care proxies, and powers of attorney. Estate Planning: Preparing for End of Life is a brief that explores this process at a basic level. The discussion includes how important it is that well-organized records be kept for investments, bank accounts, and bill paying, and that contact information made readily available for key professionals like lawyers, accountants, and financial advisors. It also discusses the key elements of estate planning. 

A Final Word

The Committee on Post-Retirement Needs and Risks hopes that both individuals contemplating retirement and professionals they work with will be able to make good use of these Decision Briefs.  They also hope that employers will be able to help employees locate this material and that more members of the public will become familiar with Committee and its continuing work on a variety of projects related to retirement issues.  Employers can link to these briefs without cost.   By sharing these ideas with a broader audience, the Committee hopes that the briefs can help plant the seeds for a broader consideration of these issues.

  • About the Author: Anna M. Rappaport

    Anna M. Rappaport

    Anna Rappaport is an internationally recognized expert on the impact of change on retirement systems and workforce issues. Following a 28-year career with Mercer Human Resource Consulting, Rappaport h…

    Full Bio | More from Anna M. Rappaport

     

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