Retirees Don't Know Their No. 1 Retirement Risk: Advisors Can Help

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July 8, 2022, 12:54 PM

Retirees Don’t Know Their No. 1 Retirement Risk: Advisors Can Help

Retirees don’t accurately understand their risks in retirement, according to a recent analysis from the Center for Retirement Research at Boston College. The brief, authored by Wenliang Hou, finds a disconnect between how retirees rank perceived risks and their objective exposure to those dangers. Advisors should take note: Understanding retirees’ blind spots in relation to actual retirement risks helps financial advisors serve clients more effectively.

5 Risks Retirees Face

This brief examines objective versus subjective retirement risks. To do so, it analyzes five major risk areas for retirees. They are:

  • Longevity risk: The risk of living longer than anticipated and outlasting savings.

  • Market risk: The risks associated with market volatility in a 401(k) plan, for example. Risk related to real estate also factors into this area.

  • Health risk: The risk associated with medical expenses and long-term-care needs.

  • Family risk: The risk associated with divorce, supporting adult children and other familial challenges.

  • Policy risk: The risk associated with the potential decline or demise of government programs such as Social Security.

The author crunched the numbers to objectively rank the financial impact of these risks in retirement. The findings: The top risk for married couples and single men is longevity. (The stats for single women are not broken out in this brief.)

“It is not surprising that longevity risk tops the list, because it affects the planning horizon for the retirement period,” the study says.

In the analysis, a couple would be willing to give up 33% of their initial wealth to avoid longevity risk. That’s compared to the 27% for a single man. The second and third places are market risk and health risk, in that order. Family risk ranks fourth. Policy risk finishes last.

How Retirees View Their Own Risks

Retirees Don’t Know Their No. 1 Retirement Risk: Advisors Can Help

When asked to subjectively rank risk, retirees may have a skewed vision of which factors present the greatest danger. For example, single men rank market risk first (up from third in the objective measurement). An individual would be willing to give up 31% of his initial wealth to avoid market risk. This “reflects retirees’ exaggerated assessments of market volatility,” the study says. Single men rank longevity risk second and health risk third.

The takeaway? Retirees tend to overestimate the hazards presented by market volatility. They tend to underestimate how long they’ll live and the medical expenses associated with a long life.

What Advisors Should Know About Perceived vs. Objective Retirement Risk

Understanding what keeps clients up at night versus what they should actually worry about is key to serving them well. Retirees may fixate on market volatility and its impact on their 401(k)s and other investment accounts while downplaying the potential risks presented by longevity and medical expenses.

Advisors may opt to help clients plan for longevity with products such as long-term-care insurance, annuities and other solutions that help retirees secure and protect lifetime income.

According to the study, “better designed public programs and private products, possibly integrated with life annuities, could be encouraged to protect retirees with limited financial resources from this potentially catastrophic risk.”

Bottom Line

Retirees Don’t Know Their No. 1 Retirement Risk: Advisors Can Help

Retirees tend to overestimate risks associated with market volatility and underestimate risks that accompany longevity and expensive medical bills. Advisors should be aware of this disconnect to quell client fears and steer them toward appropriate risk-reduction products and strategies.

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