Research Finds That Many Future Retirees Could Face a Significant Drop in Their Standard of Living; Unplanned Shock Events Are a Significant Driver of Asset Depletion

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Jan 15, 2013, 08:00 ET

SCHAUMBURG, Ill., Jan. 15, 2013 /PRNewswire-USNewswire/ -- Given recent financial challenges, retirement benefit adequacy is more important than ever, especially for those nearing retirement. A recent report from the Society of Actuaries (SOA) studies this issue by measuring retirement benefit adequacy in light of both expected and unexpected expenses in retirement.

By testing several common retiree decisions that are expected to impact adequacy, Measures of Retirement Benefit Adequacy: Which, Why, for Whom, and How Much? concludes that:

Making retirement decisions based on averages increases the risk of running out of money,
Moderate and higher income households can successfully retire with 20 percent less savings if they are willing to cut their discretionary budgets by 15 percent,
Purchasing an annuity must be balanced against the need for an adequate emergency fund,
Purchasing long-term care insurance reduces emergency fund needs for lower income and wealthy households,
Continuing mortgage payments in retirement increases the likelihood of income shortfall,
Social Security benefits are extremely important at lower income levels and
Delayed retirement is the most impactful risk-mitigation strategy, especially for the median family. Early retirement requires significantly greater assets at retirement unless major budget reductions are implemented.

"Many of the next generation retirees are facing a big drop in their standard of living when they retire and individuals need to be aware that attempts to over-simplify the retirement planning process can be very dangerous if used for personal decision making," comments Anna Rappaport, FSA, actuary and report co-author. "Planning for so-called shock events, such as expensive health shocks or ill-timed financial market downturns, must be taken into consideration since they are more likely to derail an individual's retirement plan, especially at lower income levels. Less than one third of median households will have positive wealth at death."

Next Generation of Retirees Could Face a Significant Drop in Their Standard of Living

The report begins with a conceptual discussion of benefit adequacy, including replacement ratios, projected expenditures and minimum societal standards, and the various ways adequacy has been and can be measured. It concludes that shock events are the biggest driver of asset depletion for the median income individual. The report also notes that the most appropriate measure of retirement benefit adequacy varies depending on stakeholder (plan sponsor/employer, financial planner/individual, public policymaker or financial institution).

The report's findings may be used by several important stakeholders, including policymakers, employers and markets. Policymakers can use the information to understand population needs and enact policies that support longer employment, strengthen Social Security and Medicare and make it easier for employers to offer advice and products for the post-retirement period. Employers can use the information to help plan benefit programs and communications while markets can better tailor products to meet varying needs.

"Retirement planning is an ongoing process as situations change, so it is critically important for individuals to take a holistic approach at retirement planning while incorporating the interactions between various decisions and events," Rappaport concludes. "There are many factors and risks that can affect the ultimate adequacy of retirement resources. Potential risk-mitigating steps include increasing savings, working longer, reducing expenses, paying off mortgages, buying long-term care insurance and developing plans for income in retirement."

For a copy of Measures of Retirement Benefit Adequacy: Which, Why, for Whom, and How Much?, visit http://www.soa.org/Research/Research-Projects/Pension/measures-retirement.aspx.

About the Society of Actuaries
The Society of Actuaries is an educational, research and professional organization dedicated to serving the public, its members and candidates. The SOA's mission is to advance actuarial knowledge and to enhance the ability of actuaries to provide expert advice and relevant solutions for financial, business and societal problems. The SOA's vision is for actuaries to be the leading professionals in the measurement and management of risk.

Contact: Kim McKeown
847.706.3528 [email protected]

SOURCE Society of Actuaries