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Inflation, Longevity Key Factors in Risk Management for Retirement Planning: SOA

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Although majorities of pre-retirees and retirees are considering how inflation will affect their retirement income, according to the Society of Actuaries, there's still a need for better understanding and more risk management.

SOA released a report on Monday that found 72% of pre-retirees and 55% of retirees are factoring inflation into their retirement planning, while 71% of pre-retirees and 58% of retirees say they are "somewhat concerned" about inflation risk. Sixty-two percent of pre-retirees say they are concerned about interest rates impacting their retirement, compared with 52% of retirees.

The report noted that older people bear the costs of inflation more than society as a whole due to "health costs (including cost sharing in employer plans and Medicare Part B premiums), and energy and food costs," although they are better able to offset the cost by cutting back on some luxury items they may have previously considered to be necessities.

Another problem both retirees and pre-retirees are facing is short-sightedness in retirement planning. Just 5% of pre-retirees have planned to or beyond their life expectancy and 13% look at least 20 years in the future when making important financial decisions. Among retirees, just 7% look so far into the future when making financial plans, and most (20%) look no more than four years ahead.

"Though longevity is considered critical, few respondents looked ahead even as far as their life expectancy," according to the report. "Even among those who do, many assume that planning through their life expectancy is sufficient, with little or no awareness of the financial consequences of the one-in-two chance that they may live past that point."

The report also found people who were not yet retired were more likely to be concerned about depleting their savings or having to downgrade their lifestyle, than people who had already retired. Fifty-eight percent of pre-retirees and 47% of retirees said they were worried about running out of savings. Fifty-six percent of pre-retirees were concerned about being able to maintain a "reasonable" standard of living, compared with 45% of retirees. Further exacerbating these concerns is a propensity to withdraw savings with no set plan; 39% of pre-retirees and 36% of retirees have no plan for making withdrawals.

"By not having a set plan for how they spend savings, these individuals are exposing themselves to more risks down the road, such as outliving their assets or not having funds to manage unexpected long-term care costs," said actuary Steve Vernon, FSA, MAAA. "Individuals always need to take inflation into consideration and now is the time to take action to address these inflation and longevity concerns by planning for multiple scenarios."

The report identified a slightly morbid outlook among both pre-retirees and retirees who think they would be unaffected financially if their spouse died. The SOA did not break responses down for gender. Sixty-three percent of pre-retirees and 69% of retirees said they would be "about the same" if their spouse died first. Over a quarter of pre-retirees and 19% of retirees agreed their spouses would be better off financially if the respondent died first.

"This is a confusing and potentially disturbing result," according to the report. "For most couples the husband dies first, and many widows experience a significant decline in economic well being as a result." According to the report, widows may receive between half and two-thirds of a couple’s Social Security benefits, while the cost of living could average about 75% of those of the couple. Furthermore, 40% of elderly women depend on Social Security and little else. "These results show the importance of more planning specifically focused on the surviving spouse."

The survey was conducted in July 2009 among over 800 people between ages 45 and 80.

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