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Market declines can stoke fears among retirees that they will no longer have enough assets to live on.
But it turns out that might not be the biggest financial risk they should consider 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 paper ranked real and perceived risks for retirees.
Market risk ranked first among retirees’ perceived risks, which the researchers wrote “reflects retirees’ exaggerated assessments of market volatility.” Older adults discounted the main target risk, longevity, due to being “pessimistic about their odds of survival.”
Longevity and the market, which accounts for investment and housing conditions, are just two of the top five retirement risks facing individuals and couples. The other three are health, family and political risks.
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When it comes to health care, retirees can face long-term care needs and unexpected medical expenses. These medical expenses include the sum of out-of-pocket costs not covered by insurance for drugs, insurance premiums, hospital stays, nursing home care, doctor and dentist visits, and outpatient care.
However, the research found that medical spending expectations mostly do not change with age, meaning that older people tend to underestimate the costs they may face.
Family risks include unforeseen circumstances such as a divorce, the death of a spouse, or adult children becoming ill or unemployed. 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. However, many people underestimate the possibilities that would lead them to give money to the family.
Policy changes are also a risk for retirees, especially because of the uncertain future of Social Security. Thus, the research was modeled on a reduction in one-time benefits by 2035, when Social Security trustees project that the program will no longer be able to pay full benefits. However, changes coming through congressional reform are unlikely to affect current retirees, according to the research.
Of the five risks, longevity was No. 1 for both single men and married couples, the research found. Next, health, market, family and political risks, in that order.
However, when asked to rank the risks for themselves, single men put the markets as No. 1, followed by longevity, health, family and politics, in that order.
“Retirees lack an accurate understanding of their true retirement risks,” the research states.
This can skew the decisions people make, including the age at which they decide to retire and how they decide to spend and invest their money after retirement, according to study author Wenliang Hou. Hou is currently a quantitative analyst at Fidelity Investments and previously served as a research economist at the Center for Retirement Research.
Because longevity is the primary risk, retirees should carefully plan ways to access guaranteed income during their retirement years.
“This just highlights the need for a lifelong source of income for retirees,” Hou said.
By carefully planning when to claim Social Security, you may be able to identify a strategy to help maximize your income in retirement. It’s generally worth waiting to claim until age 70, when beneficiaries can get the biggest benefit, but this can vary depending on your health and marital status.
Private sector annuities can also help, where you invest a lump sum in exchange for monthly checks. Because long-term care is a key concern, life annuities can help retirees with limited financial assets protect themselves against catastrophic risk, research finds.