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What to Worry About

Richard Connor

BOSTON COLLEGE’S Center for Retirement Research just published a study that explores what Americans think are the biggest risks to their retirement—as opposed to what they objectively are. The center found “a big disconnect between how actual and perceived risks are ranked.” That disconnect could be hurting people’s retirement planning.

The study says the biggest risk to retirement is longevity—living so long that we run out of money. But the survey found that the biggest perceived threat is a market drop that cuts into savings, which the study says is—objectively speaking—only the third biggest risk.

The study’s author, Wenliang Hou, is a quantitative analyst at Fidelity Investments and a former research analyst at the Center for Retirement Research. In order of importance, these are the five biggest retirement risks, according to his study:

  • Longevity. This is the risk that we live longer than planned and run out of savings.
  • Health. This might be the need for long-term care or perhaps a serious health issue that leads to hefty medical costs.
  • Markets. A stock market decline could devour the assets we were counting on to fund our retirement. Alternatively, our plans might be derailed by a large drop in home prices.
  • Family. Risks include the death of a spouse, a child’s financial or health problems, aging parents that need care or any other family issue that affects our retirement finances.
  • Policy. Such risks include changes to Social Security and Medicare that reduce benefits, or a pension plan that cuts its payments.

To evaluate the relative importance of each risk, Hou calculated the wealth required to enjoy a successful retirement, assuming objective levels of risk for each of the five categories. He then removed the various risks from his analysis one at a time. Each risk was ranked based on how much less initial retirement wealth a retiree would need if a given risk was eliminated.

Meanwhile, to gauge people’s subjective assessment of retirement risks, Hou used the University of Michigan’s Health and Retirement Study (HRS). The study is a “longitudinal panel study that surveys a representative sample of approximately 20,000 people in America.” It’s a treasure trove of data on retirees that goes back to 1992.

Consider longevity risk. Using Social Security data, Hou found that the chance of a 65-year-old man living to age 80 was 66%. But the HRS survey indicated that just 58% of those surveyed expected a man to live that long.

If we downplay the risk of longevity, we might not save enough for our later retirement years. What to do? We’d be better prepared for a long retirement if we devoted more time and effort to increasing our guaranteed lifetime income. This might be accomplished by delaying Social Security, choosing a job that has a pension or purchasing an income annuity.

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Hou’s analysis also found that a second risk people generally underestimate is the chance of a health setback and the need for long-term care. He found that people’s subjective estimate for their medical spending over the next year barely changes as they age—even among Americans who are 80 and older.

One risk that people can probably cross off their worry list is the chance of a policy change hurting their retirement. For married couples, Hou measured the objective chance of a policy change upsetting their retirement success at 0.1%. Why so small? Based on past changes, Social Security reform is unlikely to have a significant impact on those already retired. By contrast, for a married couple, the objective chance of outliving their savings was calculated to be 33.4%.

Of course, analyses like this one are based on averages, so the risk assessments may not be precisely right for you or me. Still, they do provide broad guidance. In my engineering career, I would always subject an analysis like this to a “sanity check” for reasonableness. This study passes that test for me.

In my many discussions with current and future retirees, I find longevity risk is frequently underestimated. Waiting to claim Social Security, and thereby getting a larger benefit, is a smart way to address the risk of a long retirement. But the people I talk to seem to have a greater fear of dying early and “leaving money on the table.” If we delay benefits and then die early in retirement, we may shortchange ourselves when it comes to our Social Security benefit. This is the reasoning I frequently hear from folks who claim reduced benefits at age 62.

But that risk is nothing compared to the chance of outliving our money. I’ve lived that scenario with my parents. I also have friends who’ve had to help their parents financially in retirement. I’d much rather have income that’s guaranteed for life—and thereby reduce the risk of outliving my assets.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.

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alex scott
alex scott
1 month ago

my immediate family was closer to a may fly than methusalah.
dad 45
mom 75
sis 55
fair/not great health for me at 64. when my wife of 29 years
died in her sleep 3 years ago, i started to cut my work/hours.
i am self employed and spending a majority of my time with a book
and a pot of coffee on the back deck with the dog rain, shine,
winter, or summer is heaven on earth. i have enuf money tucked
away to get me to 67 when i drop out all together. moving to a tiny
off grid house on a lot of land. can’t wait.

tshort
tshort
1 month ago

Great thoughts, Rick. My academic background was engineering, too, so I appreciate your analytical approach – makes sense to me!

I do worry about dying rich, though. We worked so hard to build our nest egg – it would be a shame to die earlier than expected while continuing to live frugally. Tricky to find a balance, I find, between enjoying what we’ve created while we can whilst planning for a long life.

Lastly, although it may not seem like a risk, I am finding as a new retiree that another source of risk to retirees is a long bull market occurring just prior to retirement. For us, this generated a big jump in our portfolio, giving us a level of confidence that we are now wondering about – did we pull the pin too early?? For me, I can safely say ‘no’ – I’m a good bit older than my wife and feeling urgency around getting busy living right now. Still, I do wonder whether there are pandemic early retirees out there who are now wondering whether they made the right choice as we watch the market decline and inflation run wild. Scary stuff!

Rick Connor
Rick Connor
1 month ago

Thanks to everyone for great comments and insights. It’s a fascinating topic. Thanks to Jonathan for suggesting the topic.

AmeliaRose
AmeliaRose
1 month ago

My mom worried about outliving her money. I would assure her that she was in good shape and that she and Dad had done well to put their savings in U.S. Savings Bonds (back when the interest rate was high). She passed away after a short illness at age 105, leaving a few thousand dollars which we distributed among her grandchildren and great-grandchildren.

mytimetotravel
mytimetotravel
1 month ago

I have never understood the angst about “breaking even”. Social Security is an inflation indexed annuity unavailable on the open market (at least every time I have looked). The peace of mind that provides is priceless. I waited until 70 to start my own SS, and if I drop dead tomorrow I would still be glad I waited. Besides, SS taxes supported those who were retired when they were paid, they did not go into some mythical account earmarked for the person paying them.

OBX9397
OBX9397
1 month ago
Reply to  mytimetotravel

Your comment reminded me of an article I read about a month ago. The author, Jim Blankenship, made the general argument that break-even analyses on Social Security do not make sense because “Social Security is not an investment, it is insurance,” specifically, longevity insurance. The article certainly affected the way I look at Social Security and made me more comfortable with the decision to wait until age 70. The article was at marketwatch.com. The specific link is: 

https://www.marketwatch.com/story/when-should-you-file-for-social-security-dont-be-fooled-by-the-break-even-analysis-11657651130

R Quinn
R Quinn
1 month ago
Reply to  mytimetotravel

You’re right, breaking even is not relevant. What matters is having the most money when you need it. I took mine at my NRA while still working and my wife’s and we invested it monthly into tax free municipal bond funds which after 12 years now generate monthly income nearly equal to my net SS benefit, plus we have all the principal.

AmeliaRose
AmeliaRose
1 month ago
Reply to  mytimetotravel

I also waited until I was 70 to claim Social Security. Most off my friends claim theirs when they’re 62, or 65 at most.

wtfwjtd
wtfwjtd
1 month ago

This has been my experience as well: Of all the various risks we face as we grow older, the risk of longevity is the one that’s down-played the most, especially where couples are concerned. The chances of either me OR my wife living to 90 are actually pretty good, even if the chances of both of us living that long aren’t so high. This reason alone is enough to delay drawing the larger SS check as long as possible, and makes those nonsense fabrications that people tell themselves to justify early claiming seem all the more silly. And the consequences are so asymmetrical: drawing later and one (or even both!) of us dying early is a far, far better outcome than drawing early and one or both of us living long enough to regret it.

Rand Spero
Rand Spero
1 month ago

Good insight on ignoring the financial risk of longevity. People can have a hard time imagining living as long in retirement as they spend on a full working career. I assist a 99 year old man who started working at age 25 (after law school.) He retired at age 64 after working hard for 39 years. We discussed on his last birthday that he had been retired for 35 years which nearly matched his entire career. His considerable savings plus social security and a small pension had been needed to support him far longer than he expected. We chatted about some of his unfortunate peers who were struggling to pay their bills.

James Mahaney
James Mahaney
1 month ago

Nice article Richard. We should also keep in mind that affluent retirees have seen much greater gains in longevity. In research published a few years ago, Barry Bosworth of the Brookings Institute found that life expectancy for a 55-year-old man in the top decile of income was extended six years compared to a man born just 20 years earlier.

R Quinn
R Quinn
1 month ago

Richard, I remember telling employees at retirement planning sessions back in the 1980s that longevity was their greatest risk, not only related to money, but the accumulation of several risks like inflation.

You mention death of a spouse. While the devastating emotional risk is obvious, what I find is frequently overlooked is the ongoing financial needs of a survivor. It’s pretty certain that for most couples there will be a significant reduction in income without a proportional reduction in expenses.

Too many people in my experience overlook this risk or in some unfortunate cases, don’t care.

jeff berkowitz
jeff berkowitz
1 month ago
Reply to  R Quinn

Also regarding death of a spouse – beyond the decreased income, the surviving spouse now jumps into a higher tax bracket (‘widower’s penalty’) as a new ‘single’ from ‘married filing jointly’.

Edmund Marsh
Edmund Marsh
1 month ago

Richard, good breakdown of the data. I telephone my 93 year old mother every evening. Last night, we had a laugh when I reminded her that she had planned on an early death at 85. Instead, she is outliving younger friends. She has a realistic view of her mortally, and is able to laugh, but it would be hard to find humor without her pension, SS, and savings.

Jeff Vinick
Jeff Vinick
1 month ago

It’s good to know the risks of retirement. What concerns me, though, is simply whether I’m at risk. What’s the magic net worth or portfolio amount that provides security and peace of mind? 3 million, 4, 5? I suppose it also depends on what you spend in retirement. Is having 30x your planned annual budget enough or do I need 40 or just 25? There are lots of things to worry about. I want someone to tell me when I can stop worrying. And maybe even retire. I guess for now I’ll look to the 4% rule as a guide.

B Carr
B Carr
1 month ago
Reply to  Jeff Vinick

I agree with Jonathan. And these questions are discussed regularly on the Bogleheads forum @ bogleheads.org. Look there for good answers taylored to your specific situation.

Jonathan Clements
Admin
Jonathan Clements
1 month ago
Reply to  Jeff Vinick

If you’re asking yourself such questions, I strongly suspect you’ll be just fine!

Paula Karabelias
Paula Karabelias
1 month ago
Reply to  Jeff Vinick

My husband and I have always managed our investments but before we both retired early we each met with the financial planners that our companies employ (different companies/ different planners). Both confidentally said ” You will never run out of money”. (far from it ). Our estate attorney said the same thing and we are planning accordingly . Perhaps you could get some piece of mind by getting a couple of opinions from CFPs/CFA’s).

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