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New Study Says Retirees Are Worried About the Wrong Things

Category: Financial and taxes in retirement

July 6, 2020 — A new study focussed on the financial issues that retirees should really be concerned about, and then it measured what they actually worried about. The results are interesting – it seems like many people are downplaying the risks that should concern them, like how long they will live, and instead concentrating on issues that are less worrisome, such as market risk.

In “How Well Do Retirees Assess the Things They Should Worry About“, the researchers used a host of data from various sources to measure 5 areas of concern for anyone in retirement. Then they ranked those risks in order:

Actual Financial Risks

  1. Longevity. The worry should be that you will live longer than expected and run out of funds.

2. Markets. That a disintegrating stock market of other economic catastrophe wipes out retirement savings. Being priced out of the housing market would be another.

3. Health. The fear that you or a spouse will get seriously ill and require hospitalization or long term care needs. That could create high out of pocket expenses, along with ruining the ability to enjoy retirement.

4. Family. The someone in the family will get divorced, die, or economic troubles – which could in turn require the retiree to transfer significant amount to help them out.

5. Policy. The main risk in the policy area seems to be Social Security. Particularly if Congress fails to act on replenishing the Trust Funds before 2035, those receiving benefits could see significant cuts and experience a decline in their lifestyle.

Perceived Risks:

When the researchers asked people over 50 to rank how they felt about these risks, this was the ranking order:

  1. Markets. The study asked people to rate if the stock market would be higher or lower next year, the probability of gaining or losing more than 20%, and house values. People significantly overrated the actual market risk from a historical perspective.
  2. Health and Medical Expenses. Respondents were asked the probability of spending various amounts for health care expenses in the coming year. As people aged, they tended to seriously underestimate how much the objective data says they should expect to pay.
  3. Longevity. Subjects were asked to rate the probability of living to various ages. They almost always assumed they would die before their actuarial likelihood. For example, 64% of the women aged 65-69 assumed they would live to age 80, while the actual probability is 75-78%.
  4. Family. They were asked to rate how likely they would have to transfer $5000 or more to a family member in the next 10 years. Most subjects under-rated how likely that would be.
  5. Policy. This question was to rate the risk of a significant cut to Social Security in the future, and about 40% expected that cut. Thanks to our dysfunctional Congress, at this point no one knows the real answer to that question.

Bottom line – Longevity is the most crucial disconnect

A comparison of actual risks vs. perceived risks shows that even though people often have an incorrect idea of the risks, they rank most of them in roughly the right order. The biggest disconnect, however, is longevity, and that could have serious consequences. Longevity is the biggest actual risk, but people ranked it only as #3 . Single men seemed to have some of the worst predictions – their actual concern for longevity should be about double their perceived risk (27% vs. 15%). What this means in practice is that people are at risk of spending down their savings too fast, ending up with nothing to live on but Social Security in their later years. To the same extent, their underestimates on other issues like the likelihood of family transfers and medical expenses could also cause trouble. It looks like folks can at least worry less on financial risk.

About the study

This study mainly used data from the Health and Retirement Study (HRS), a biennial longitudinal survey of a representative sample of U.S. households over age 50.

Comments? Ask yourself the probability of you experiencing these risks, and compare the results to the actual. If you are underestimating how long you are going to live or how much you might have to spend for medical or long term care expenses, perhaps you should re-evaluate your retirement budget! Please comment in the section below.

Posted by Admin on July 6th, 2022

4 Comments »

  1. My main concern is I will outlive my modest IRA. I’m super conservative about spending it. Happily, I like my modest lifestyle and am having fun without spending down my IRA. The stock market is taking care of that for me. Sigh. A friend keeps urging me to take out money to “enjoy my retirement,” as if I would be happier buying shoes or marble countertops. No, that’s not for me. So far I’ve been using it for home maintenance. My family tends to live into their 90s, so I approach my longevity with that in mind. The next concern is my health, staying healthy, and doing all those things that I know will help me – none expensive. The market is my next concern, as it is chipping away at my IRA; policy is my fourth concern as I want Social Security to remain solvent; and the last concern is family, as I don’t have children. I know there are no guarantees for any of my concerns. I continue to do the best I can for myself in all aspects of my life. Have a great day!

    by Elaine C. — July 7, 2022

  2. What I always say to people when they say you should take out money ”to enjoy my retirement”,..I always say 1)just not having to work is actually quite amazing.2)trust me,..if something was that important to me I would have already bought it,..or experienced it by the time I turned 58.(which is when I retired).

    by steven diorio — July 7, 2022

  3. ElaineC, Bravo! Wise approach! I completely agree with steven diorio.

    As far as the markets, we are all basically in the same boat. If they improve long term as expected, we win as long as we stay in. If not, then we are all scr—d. History says the former. Hold the door. Um, I mean, hold the line.

    by RichPB — July 8, 2022

  4. ElaineC, Like you I’m not taking anything out of my savings, I’m living on my SS and pension. My IRAs have tripled since 2007 even though I’m no longer contributing to them, but I do reinvest the dividends. I have 50% in stocks and 50% in bonds. I used to worry about stock market declines, but after going through the 2000-2003 downturn, and the 2008-2009. I don’t worry about it anymore. I know the market will come back and there is no need for me to tap those accounts now.

    by Tom B — July 9, 2022

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