Using a focus-group method, the Society of Actuaries sought to figure out how retirees are dealing with, or how they plan to deal with, making more financial decisions on their own in retirement. Particularly, the authors of the survey wanted to know how the retirees, who were between two and 10 years into retirement, made the decision on their retirement date, how much they needed to save and how they plan to allocate their money in retirement so they can maintain their lifestyles.
The study actually shows the retirees were spending more in retirement than they did beforehand, with one participant commenting that he spends “a lot more money than I thought I would spend, mostly entertaining myself.” And while many of the group members lacked the financial foresight to consider market effects, they are reluctant to ask for advice.
The post retirement cost participants most often overlooked are the rising costs of prescription drugs and gas, according to the report. In fact, the authors of the report found that most participants rarely considered the effects of inflation.
The study is an outcome of discussions from six focus groups with retirees who have at least $100,000 in assets to invest, which they depend largely on to last them through retirement. The retirees in the focus groups lacked sufficient Social Security money and defined benefit plans to cover their expenses in retirement.
A Lesson in Poor Planning
Very few of the participants did extensive amounts of financial planning prior to deciding when to retire and had given little consideration about the age at which they planned to retire, or if they would have enough money to do so. One female respondent from Chicago said, “I never sat down and thought, I am 59, and in 30 years I’ll be 89. Have I allocated enough for 30 years? I never did that. Theoretically I should have. But it doesn’t seem to make any difference.”
Other participants admitted the same lack of planning, looking at retirement as merely an age that they want to stop what they were doing without making sure they were financially able to do so. One group member admitted to not doing any calculations, likening the decision to retire to the simplicity of snapping her fingers, for both her and her husband.
The authors of the report found most people made the decision to retire based on a “feeling” that they can meet their monthly expense responsibilities, rather than sitting down to scribble down the actual costs. Participants were fairly confident they could come up with their monthly expenses, but most had not asked an adviser for help. One of the participants went to greater lengths to calculate retirement expenses and income, but left out the costs of prescription drugs, which are only expected to inflate in coming years.
Shrugging off Investment Opportunities
For most of the participants, retirement did not prompt a change in investment allocations.
Among the focus group participants, investment strategies were all over the board after retirement. Some said they became more aggressive with there investments, a move prompted mostly by handing their money over to advisers after retirement, which usually meant turning more of their money over to equities. And if retirees became more conservative with their investments in post retirement, the reasoning spawned from an attempt to shield their nest eggs from market volatility, according to the report.
However, many of the participants are drawing a stream of income from Social Security and defined benefit plans, and do not concern themselves as much with investments that are tied to market performance.
Many of the participants said they withdraw money from nonqualified plans and allow qualified plan money to continue to grow tax-deferred. The study also found most participants didn’t withdraw a set amount of money each month, but rather on an “as needed” basis. One participant commented, “You automatically know what you can spend. You kind of go on automatic pilot and know how much is too much and how much is enough.”
Of the participants, only a few of them had purchased annuities and even those had only done so with the suggestion of an adviser. Many of the participants thought they could do a better job of managing their money than insurance companies, selling annuities and a few of the participants said they thought annuities were good for people who do not want to manage their own assets or who are financially unsophisticated.
Even though the two greatest concerns among participants were high medical expenses and long-term care expenses, these are the two areas that they planned the least when figuring out whether or not they could retire.
In the area of long-term health care, many of the participants do not have long-term health coverage, with most of them feeling as though they can’t afford the premiums. One female participant from Arizona said, “I haven’t avoided it, I’ve thought about. But I don’t think it’s practical to spend thousands of dollars a year on something [long-term care insurance] that may happen.”
For a full copy of the report, go here .
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