trendspotting | PLANADVISER November/December 2016

Financial Shocks in Retirement

Nearly three-quarters of retirees will face an unwelcome surprise

By Lee Barney | November/December 2016
Art by Marcos Maguma

Nearly three-quarters, 72%, of retirees experience at least one financial shock at some point in their post-employment years, and for one-third of them, it depletes their savings by 25%, according to the Society of Actuaries (SOA) 2015 Risks and Processes of Retirement Survey.

Pre-retirees expect to live to age 85, but the latest SOA mortality data finds that a 65-year-old male will live to age 86.6, while a 65-year-old female will reach age 88.8. Nonetheless, 55% of pre-retirees and retirees do not anticipate living that long.

Sixty percent of pre-retirees expect their spending to decline as they age in retirement. This is consistent with what retirees experience, according to the SOA. Only 38% of retirees said expenses in retirement were higher than they expected.

To reduce costs in retirement, 90% of retirees are spending less on purchases, 70% are dining out less, 56% are traveling less, 44% are cutting back on gifts and charitable giving, 17% have moved to less expensive housing, and 11% have refinanced their mortgage.

Twenty percent of pre-retirees and 30% of retirees said that if an emergency were to arise, they could spend up to $25,000 without jeopardizing their retirement security. However, 20% of both groups said they could spend no more than $1,000 on an emergency without putting a serious dent in their savings.

Fifty-six percent of pre-retirees said the debt they carry has either somewhat or greatly limited the amount they can save for retirement. By contrast, 56% of retirees said their debt has little or no impact on their lifestyle.

The survey also found that pre-retirees worry more about expenses than do retirees. Sixty-nine percent worry about paying for long-term care, compared with 52% of retirees. Other concerns include: health care costs (67% vs. 47%), maintaining a reasonable standard of living (63% vs. 45%), running out of savings (62% vs. 43%) and inflation (76% vs. 66%), all comparisons respectively.

Half of both pre-retirees and retirees have not consulted with a financial adviser. Only 15% of pre-retirees and 20% of retirees consult with an adviser at least once a year.

“The developing situation with regard to retirement resources, such as Baby Boomers entering retirement age and the decline in defined benefit [DB] plans, means many older Americans will face difficult spending and debt management challenges,” says Carol Bogosian, a member of the SOA’s Committee on Post-Retirement Needs and Risks. “The actuarial profession in particular will be called on to revisit strategies and help systems adapt, as will other specialties that focus on the lives and issues of American pre-retirees and retirees.”