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Market declines could fuel retirees’ fears of not having enough assets to live on.
But it turns out that might not be the biggest financial risk they should watch out for in retirement.
Instead, longevity — potential retirees may live longer than expected and run out of money — is actually the biggest financial threat, according to recent research from Boston College’s Center for Retirement Research. The document ranked real and perceived risks for retirees.
Market risk ranked at the top of retirees’ perceived risk, which the researchers said “reflects retirees’ inflated assessments of market volatility.” Older adults dismissed the highest objective risk, longevity, because of their “pessimism about their chances of survival.”
Longevity and the market, which explains investment and housing conditions, are just two of five major risks that individuals and couples face in retirement. The other three are health, family and political risks.
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When it comes to health care, retirees may face unforeseen long-term care needs and medical expenses. These medical expenses include the sum of out-of-pocket expenses not covered by drug insurance, insurance premiums, hospital stays, home nursing care, visits to the doctor and dentist, and outpatient care.
Yet research has found that expectations for medical expenses generally do not change with age, meaning older people tend to underestimate the costs they may face.
Family circumstances can put retirees at risk
Family risks include unforeseen circumstances such as divorce, the death of a spouse, or the illness or unemployment of adult children. According to the research, about a third of households with people aged 65 and over transfer money to family members over a two-year period. Yet many individuals underestimate the possibilities that would entice them to give money to their family.
Policy changes are also a risk for retirees, especially given the uncertain future of Social Security. As such, the research modeled a one-time reduction in benefits by 2035, when Social Security administrators predict the program will no longer be able to pay full benefits. However, any changes brought about by congressional reform would be unlikely to affect today’s retirees, according to the research.
Of the five risks, longevity was No. 1 for single men and married couples, according to the research. Next come health, market, family, and policy risks, in that order.
However, when asked to rank risk on their own, single men ranked markets first, followed by longevity, health, family and politics, in that order.
“Retirees lack an accurate understanding of their true retirement risks,” the research says.
It can skew the decisions people make, including when they decide to retire and how they decide to spend and invest their money after retirement, according to Wenliang Hou, author of the research. . Hou is currently a quantitative analyst at Fidelity Investments and previously served as a research economist at the Center for Retirement Research.
Since longevity is the primary risk, retirees should carefully plan ways to access guaranteed income throughout their retirement years.
“It just underscores the need for a lifetime source of income for retirees,” Hou said.
By carefully planning when to claim Social Security, they may be able to identify a strategy for maximizing their retirement income. Generally, it’s beneficial to wait until age 70, when beneficiaries are likely to get the greatest benefit, but this can vary depending on your health and marital status.
Private sector annuities, where you invest a lump sum in exchange for monthly checks, can also help. Because long-term care is a major concern, life annuities can help retirees with limited financial assets protect against catastrophic risks, research suggests.