Get The Word Out On Retirement Risks
Annuities, health insurance, pensions, long term care insurance, and life insurance can help those in their sunset years to manage the various risks they face (see Chart 1).
Unfortunately, despite the best efforts of some producers, clients often greet products geared toward senior markets with little enthusiasm.
The lukewarm reception can be surmised in part from sales results. For example, although they have been increasing, immediate annuity sales represent only a tiny fraction of total individual annuity sales, according to LIMRAs individual annuity sales survey. The individual LTC insurance market is also far from saturated.
Considering the complexities of 21st century retirement and the two-decade-long shift in responsibility for retirement planning and funding from institutions, this reluctance seems remarkable.
Traditional pensions and employer-sponsored retiree health insurance are on the decline. People are concerned about the future of Social Security. Increasing life expectancies and health care costs only serve to complicate matters. Add to this the risk of a prolonged illness that could require long-term health care.
Without adequate assets or insurance protection, severe illness could decimate a retirees savings and threaten his ability to remain self-supporting, particularly if he survives a serious illness in relatively good health.
Even so, perhaps partly due to the many changes affecting retirement and the financial services industrys emphasis on saving for retirement, little attention has been paid to educating workers about retirement planning. Nor has much attention gone towards developing effective solutions for retirees to help them manage an increasingly complex retirement equation.
Moreover, some people would rather not think about the implications of growing old–nursing homes, the loss of independence, and so on.
As a result, many retirees and people approaching retirement are either unconcerned or unaware of the many risks they face in their retirement years. This needs to change.
LIMRA recently surveyed retirees and pre-retirees about their retirement planning, financial situation in retirement, and level of concern towards and preparedness of retirement risks. Surveys were sent to retirees between ages 55 and 78 and pre-retirees (defined as individuals planning to retire within the next two years) aged 50 to 70.
Among retirees and pre-retirees alike, there was a distinct pattern in their levels of concern about these risks.
They were most concerned about health-related risks, followed by financial risks, with mortality-related and other risks being of least concern. Chart 2 shows the percentage of retirees and pre-retirees who labeled as “a major concern” the risks that could impact their standard of living
Clearly, increasing health care costs and prescription drug costs remain front-of-mind. This may have been helped by the most recent presidential campaign, which made these pivotal issues.
The facts are these: Nearly all retirees and pre-retirees surveyed have some source of health insurance coverage. Medicare covers four in five retirees and three in five pre-retirees have coverage with their current employer.
Yet, just one-quarter of retirees and one-sixth of pre-retirees claim to own LTC insurance (figures we believe to be overstated due to confusion and lack of understanding about this insurance).
Cost is the major reason given for non-ownership of LTC insurance. However, other research, conducted by LIMRA and the Health Insurance Association of America, shows that people typically grossly over-estimate what LTC insurance costs. Some claim they dont or wont need LTC. Many (incorrectly) believe Medicare will pay for it. Others believe they have enough assets to get them through any type of LTC they might need, and still others claim they dont know enough about it.
As for financial risks, Chart 2 shows tax increases are of slightly higher concern among retirees than pre-retirees, even though many retirees will likely end up not needing to pay them. Tax avoidance (legally, of course) is often the topic of seminars aimed at retirees. Those saying they have taken tax increases into account in their planning are more likely to have formal, written financial plans and have more assets.
Many older people living on fixed incomes have experienced first-hand the impact of even modest inflation over an extended time period.
Fortunately, Social Security and a majority of employer-provided pensions (at least those receiving payments today) are indexed for inflation. But, as people assume responsibility for a growing portion of their retirement income needs, how will they account for inflation?
There is no shortage of advice on investing for longevity or on withdrawal strategies that account for inflation. What is lacking, however, is a sufficient number of inflation-adjusted annuity products.
Had we conducted this survey two years ago, the concern about a potential stock market downturn would likely have been lower than it is today. Even so, as the portion of ones assets in equities increases, so does the percent of people who claim theyve taken this risk into account in their retirement planning. It turns out that those saying this are more likely to have a formal, written financial plan and to be affluent.
While short-term interest rates couldnt go much lower, yields on longer-term debt instruments could. The many retirees using fixed income products (especially certificates of deposit) as a major source of income have felt the impact of the long-term decline in interest rates that occurred over the last 20 years.
What about the mortality-related risks? The risk of outliving ones assets was of more concern than only one other risk–the assistance that other family members may need.
Is it, then, any wonder that people are not annuitizing in great numbers? Perhaps the widely available advice on withdrawal schemes from retirement assets has served to make people think that their chosen withdrawal strategy will take care of them.
Retirees and pre-retirees, though, are likely to underestimate their longevity. When asked how long they expect to live, retirees underestimated their actuarial life expectancies by about 2.5 years and pre-retirees just over one year.
If, as much prevailing advice on managing retirement income suggests, people are managing assets according to their assumed life expectancy, they risk not having enough should they live longer.
A second type of mortality risk (married) seniors face is the risk of the death of a spouse. The financial implications for the survivor often include a reduced standard of living. Another commonly overlooked risk is the chance that the spouse who handles the couples financial matters dies first, leaving the survivor who is less familiar with household finances to deal with them.
Those saying theyve accounted for the order of death are more likely to: a) have life insurance coverage and more life coverage if they own it; b) have their pensions continue to their spouse; and c) possess higher assets.
What does all this mean for financial services firms? Educating your customers about the retirement risks they may face is a very important role you can and should play–particularly if you can offer product solutions to those risks.
We have found the relative levels of concern towards these risks an eye-opening experience.
For example, we initially thought the fear of outliving ones assets would be near the top, not the bottom, of the list. If retirees follow Maslows hierarchy of needs when it comes to managing retirement risk, many will seek to satisfy their concerns regarding health-related risks well before considering mortality risk. For such individuals, immediate annuity sales pitches will fall on deaf ears.
In addition to educating customers, consider developing marketing approaches and product solutions that address a wide range of retirement risks.
Without providing appropriate information and guidance on these risks and without offering approaches covering many or all risks, industry players run their own risk–that of missing potential sales opportunities from customers who are either uninformed or whose priorities dont line up with the single product being pushed on them.
Matthew Drinkwater, Ph.D., ACS, is assistant scientist, and
Eric T. Sondergeld, ASA, CFA, MAAA, is corporate vice president at LIMRA International, Windsor, Conn. You can e-mail them at email@example.com and firstname.lastname@example.org, respectively.
Reproduced from National Underwriter Life & Health/Financial Services Edition, April 29, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.