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Session 805 - Substituting Facts for Impressions:
A Look at Retirement Plan Preferences
Presenters:  Emily K. Kessler, Stephen M. McGivney
Recorder: Gregg M. Burk

At the 2008 Enrolled Actuaries Meeting, Emily Kessler, Managing Director of the Society of Actuaries, and Stephen McGivney, Executive Vice-President of Aon Consulting, discussed a 2005 survey carried out by EBRI and the Society of Actuaries about retirement risk. The survey was the fourth in a series intended to evaluate risk awareness compared to actual retirement needs.

Optimism About Retirement?
One major observation that the presenters discussed was that working people tend to be overly optimistic about their anticipated retirement needs. The results showed that people actively working are inadequately concerned about the risk they will face in retirement.

This apparent optimism can be appalling. Stunningly, when asked when they expect to retire, one in three pre-retirement participants responded that retirement doesn’t apply to them. It’s difficult to imagine that someone with this attitude will be properly prepared.

Stages of Retirement
Nevertheless, realistic retirement planning can be very complicated. As explained, retirement can be broken down into three stages that need consideration:

1) Dream State – The retirement stage highlighted in TV commercials. In this stage, a retiree’s needs and abilities are similar to pre-retirees.

2) Moderate decline – This stage includes a moderate decline in abilities that corresponds to a change in needs.

3) Advanced decline – The final stage of retirement where retirees are much less capable and have very different needs.

The top retirement risks people face center around the ability to afford adequate healthcare and meet the changes of inflation.  Both of these risks tend to become more problematic as a retiree advances to the later retirement stages. However, the study showed that only about 50% expected their financial needs to increase in stages 2 and 3, and more surprisingly it revealed that 17% of pre-retirement participants expected to need less money. 

Especially at-risk are those with poorer health or lower income. Retirees with poorer health will have a shorter stage 1 retirement and long stage 2 and 3 phases. Similarly, lower income retirees may not have any options in managing retirement risks other than by curbing spending habits.

Retirement Patterns
The study found that pre-retirees expected to work longer to prepare for retirement. For example, 66% of pre-retirees were expecting to work beyond age 65 before retiring. In contrast, 77% of current retirees began retirement before age 65.

There are many advantages to working longer and delaying retirement. These advantages include continued health coverage, larger benefits from employer sponsored retirement plans, increased Social Security benefits, and a shorter duration to exhaust retirement savings.

However, the plan to work longer appears to be overly optimistic.  Looking back at the series of surveys conducted, Emily and Stephen pointed out that despite the pre-retiree’s expectations, the truth is retirement patterns aren’t changing.

This is also true for pre-retirees who plan to work during retirement. From the survey, 60% of pre-retirees expect to work during retirement to supplement their income.  This expectation appears to be overly optimistic as 67% of actual retirees stopped working at retirement.

Risky Times
The presenters explained that people’s retirement habits tend to mimic those of their parents.  The trouble is that the sources of retirement income have changed significantly from prior generations.  This is characterized by the shift in employer-sponsored retirement plans from traditional defined benefit to defined contribution.

The presenters questioned the reasonableness of this trend. Do defined contribution plans adequately fit people’s retirement needs? They would suggest no. The study shows that pre-retirees with defined benefit plans were twice as likely to expect 50% or more of their retirement income to come from employer sponsored retirement plans.  Moreover, pre-retirees covered only by defined contribution plans are more likely to expect to rely on part-time employment during retirement than employees covered only by defined benefit plans.

Defined contribution plans provide no lifetime income, and the individual responsibility for managing these retirement savings comes with significant risks.  This was emphasized in the study by the importance older retirees placed on Social Security benefits. Social Security benefits include cost of living adjustments to fight against inflation and to provide lifetime income.

Possible Solution
In order to help retirees manage risk, the presenters covered a number of possible ideas.  These ideas include enhancing employer-sponsored education to help employers understand retirement risks. They also discussed policy and other changes designed to encourage the annuitization of investments and delaying retirement.

More information about the survey can be found on the SOA’s website, www.soa.org.  At the website, type “2007 retirement risk” in the Quick Search box in the upper left hand corner and click Go.