Data & Research March 29, 2012

Retirees Most Concerned With Inflation

The greatest retirement planning concerns among Americans include protection against inflation, the ability to pay for health care and the cost of long-term care.  
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According to “The 2011 Risks and Process of Retirement Survey,” sponsored by the Society of Actuaries (SOA), the retirement risks that most concern both retirees and preretirees are:

  •  Keeping the value of their savings and investments up with inflation (69% of retirees, 77% of preretirees);
  •  Having enough money to pay for adequate health care (61% of retirees, 74% of preretirees); 
  •  Having enough money to pay for long-term care (60% of retirees, 66% of preretirees); 
  •  Being able to maintain a reasonable standard of living for the rest of their life (59% of retirees, 64% of preretirees); 
  •  Varying income as a result of changes in interest rates (57% of retirees, 64% of preretirees); and 
  •  Depleting their savings (54% of retirees, 63% of preretirees).

“Except for health coverage, insurance products such as annuities and long-term care insurance are not seen as major components of retirement planning,” said actuary and retirement expert Anna Rappaport, FSA, MAAA, who serves as chairperson of the Society of Actuaries’ Committee on Post-Retirement Needs and Risks. “As a result, many retirees continue to be at risk of running out of assets and having to rely solely on Social Security.”

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A major concern is that many people have a shorter planning horizon than their future expected lifetime, according to the SOA. Despite this, retirees are more likely than in 2009 to say their planning horizon is at least 10 years (34%, up from 23%), while preretirees are more likely to say it is at least 20 years (19%, up from 13%). Meanwhile, more than one in three preretirees feel retirement will not apply to them due to finances or a desire to continue working.

If they were to live five years longer than expected, retirees indicated they would be more likely than in 2005 to:

  •  Reduce their expenditures significantly (64%, up from 53%);
  •  Dip into money that might otherwise have gone toward an inheritance (49% of retirees, up from 42%), and
  •  Deplete all of their savings (45%, up from 35%). 

Preretirees show no significant change from 2005 in the consequences they anticipate, should they live five years longer than expected. In fact, only one-third (35% ) of preretirees have a plan for financing their retirement. Meanwhile, nearly six in 10 retirees (57%, up from 44% in 2005) report they have a plan for how much money they will spend each year in retirement and where that money will come from. 

The survey was among 1,600 adults, ages 45 to 80 (800 retirees and 800 preretirees).

To read the full study, "The 2011 Risks and Process of Retirement Survey," visit http://www.soa.org/files/pdf/research-2011-risks-process-report.pdf.

The Markets March 29, 2012

Investors Still Misunderstand Roth IRAs

New research shows that most investors ages 21 to 50 are generally familiar with the tax advantages of IRAs and have used them to save for retirement.
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However, some appear to confuse the specific benefits of traditional individual retirement accounts (IRA) and Roth IRAs, the two most commonly used IRAs, according to a T. Rowe Price survey.  

When asked how familiar they are with IRAs, 70% of respondents described themselves as “familiar” or “very familiar.” In addition, 79% said they have personally contributed to an IRA.Generally, investors seem to understand that IRAs may bring tax advantages such as tax-deferred earnings, tax deductibility or tax-free withdrawals, but some investors do not appear to fully understand which benefits are associated with traditional IRAs and which are associated with Roth IRAs.  

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For example, nearly half (48%) of investors in the study correctly cited tax-deferred growth potential and the ability to reduce taxable income with tax-deductible contributions as features of Traditional IRAs. However, one-fifth (21%) incorrectly cited the ability to withdraw savings without paying taxes after age 59.5 if the account has been open for at least five years as a benefit of Traditional IRAs, which instead is a benefit of Roth IRAs.  

Similarly, about half (51%) of respondents correctly cited tax-free growth potential as a benefit of Roth IRAs and almost one-third (31%) knew that Roth IRAs provide for tax-free withdrawals after age 59.5 if an account has been open for at least five years. But, about one-fifth (21%) incorrectly believed that Roth IRAs allowed for tax-deductible contributions.  

“It’s encouraging that a majority of younger investors are familiar with IRAs, generally understand that the accounts offer tax advantages, and have used IRAs to save for retirement,” said Christine Fahlund, senior financial planner with T. Rowe Price. “But it appears that there’s more that we can do to teach younger investors about the different types of IRAs so they can make more informed choices. For investors without access to a workplace retirement plan, IRAs are the only accounts available to save specifically for retirement. The challenge and responsibility of educating each new generation of young investors while they still have decades to save must be paramount for parents, educators, employers and financial institutions.”

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