NU Online News Service, Nov. 18, 2003, 1:40 p.m. EST – Living longer in uncertain economic times could jeopardize many Americans’ plans for a comfortable retirement, says the National Retirement Planning Coalition, Washington, a group of financial industry organizations.
Current and future retirees face a variety of risk factors that may cause their retirement resources to run out well before their retirement objectives are fulfilled, says the NRPC in a study released today.
The study, conducted by Ibbotson Associates, Inc., Chicago, says retirees face two risks to their assets. There is longevity risk, the chance that they or their partner will outlive their assets. And there is financial market risk, the threat that unexpected, lengthy stock market declines will chip away at the value of their investments and the income those investments produce.
Many retirement planning calculations use age 85 as a typical assumed life expectancy, notes Roger Ibbotson, founder and chairman of Ibbotson Associates. But today, many individuals live longer.
Of individuals who reach 65 years of age, more than 50% of single females and more than 40% of single males will still be alive at age 85, says Ibbotson, citing data from the Society of Actuaries, Schaumburg, Ill.
For married couples, in 72% of the cases at least one spouse will still be alive at age 85. In fact, in 18% of cases, at least one spouse will survive to age 95, actuarial data show.
Consequently, survivors who had planned to have their retirement income last just until age 85 would have depleted their retirement resources, other than pensions and Social Security, before their actual death.
As for market fluctuations, retirees may be mistaken in thinking that these will always balance out over time. As the recent three-year sustained market decline showed, there are times when a constant withdrawal strategy combined with prolonged negative market forces can deplete assets severely , leaving retirees without retirement income far sooner than expected, NRPC says.
To illustrate, Ibbotson did an analysis of a hypothetical 65-year-old investor with a $1 million portfolio invested 60% in stocks and 40% in bonds, with a goal of $65,000 in annual retirement income from the portfolio.
The analysis shows a 10% chance that this portfolio would be depleted by age 84; a 25% chance of depletion by age 89; and a 50% chance of depletion by age 100.
These risks can be reduced significantly by focusing financial planning on retirement investments that guarantee income, argues NRPC. This would include fixed and variable annuities and mutual funds, the coalition suggests.