Data and Research November 28, 2018

Most Retirement Risk Concerns Decrease With Age

The Society of Actuaries says individuals must first understand all the risks related to retirement so they can take steps to manage them.

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Retirees face many financially related risks, including living longer than their financial resources, a major long-term care event, investment and inflation risk and unexpected medical expenses.

The Society of Actuaries (SOA) analyzed financial risk management across five generations. It found some concerns around retirement-related risks are consistent across each generation, while others, such as the ability to deal with unexpected expenses, vary by age, and there is a significant amount of variation on how much planning and preparation individuals undertake to withstand financial risks.

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The ability to handle unforeseen expenses increases with age, peaking with Early Boomers and then declining for the Silent Generation. Six in 10 Early Boomers say they could afford a $10,000 expense using their savings or emergency funds. Only 46% of Millennials would use their savings, which is not surprising since they have lower assets and more competing financial priorities. Those in the Silent Generation are particularly vulnerable, with half not being able to use their savings for an unexpected $10,000 expense. This is consistent with and may be reflective of the fact that only half of all respondents are prioritizing building up an emergency fund to safeguard against unexpected expenses.

Millennials are most concerned with having enough money to pay for health care in retirement (69%), and concern decreases with age—66% among Gen X, 62% among late Baby Boomers, 53% among early Baby Boomers and 49% among the Silent Generation. However, saving for the future medical costs is only a high priority for on average 36% of respondents.

Nearly two-thirds (63%) of respondents are worried they might not have enough money to pay for a long period in a nursing home, yet saving for long-term care is a high priority for just one-third of respondents.

Two-thirds of respondents are concerned that the value of their savings and investments might not keep up with inflation in retirement. This concern also decreases with age, with almost three-quarters of Millennials (73%), compared to just over half of the Silent Generation (53%), expressing high concern over inflation. The SOA says as Millennials have the longest time until retirement, and thus greater uncertainty, their concern over inflation risk is understandable.

While living longer than expected is desirable, it presents a financial risk because the longer retirement lasts, the more it costs, the SOA says. Also, a long life increases the likelihood of other risks, such as an increased need for long-term care or having high medical costs. The study found 63% of all respondents are concerned with not being able to maintain a reasonable standard of living for the rest of their lives, and 61% are concerned with depleting all of their savings. However both concerns decrease with age, ranging from 72% and 69% among Millennials to 47% and 46% among the Silent Generation, respectively.

One-quarter of all respondents indicate their level of debt is complicating their ability to manage their finances. Older generations are less likely to indicate this and are also more likely than younger generations to say they have no debt.

Managing retirement risks

According to the SOA report, there are many ways to manage the various risks that can hinder financial security in retirement. For example, sticking to a budget and a monthly savings plan can help mitigate the risks of unexpected expenses and longevity later in life. Currently, 61% of Millennials are sticking to a budget and another 45% are sticking to a monthly savings plan, both higher than older generations. Yet, members of the Silent Generation have a higher likelihood than Gen Xers or Boomers of sticking to a budget (53% versus 49% of Gen X, 48% of late Boomers and 46% of early Boomers).

Across all generations, one-third are making efforts to get their debt under control, with Millennials much more likely to be doing so (41%). Addressing debt, especially those with high interest rates prior to retirement, can alleviate pressure on savings and emergency funds and allow more focus on other risk management strategies, the SOA notes.

Putting money into an employer-sponsored retirement plan is a strategy about three in 10 Millennials, Gen Xers and Late Boomers are employing currently. In addition, targeting investments to grow money and produce income both now and in retirement is a strategy more likely being employed by Late Boomers (27%), the majority of whom are gearing up for retirement.

The SOA says a key goal of this body of research is to increase knowledge and encourage action to help individuals effectively protect against the financial consequences of each risk. “It is our hope that the insights this research has provided about each generation will lead to further efforts to educate individuals on the key steps to financial security and enhanced protection against adverse events that pose a threat to that security,” it concludes.

The report, Financial Risk Concerns and Management Across Generations, may be downloaded from here.
Data and Research November 28, 2018

Encouraging Workers to Save While Paying Off Debt

Workers facing debt payments must also prioritize long-term savings, as difficult as this may seem.

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Nationwide Retirement Institute has published a new analysis focused on instilling positive savings behaviors among younger workers, “Smart financial moves in your 20s and 30s.”

According to Nationwide, most people wish they had handled their money differently in the past year, including many who say they wish they had saved more for retirement. On average, the survey shows, employees start saving for retirement at age 31.5—meaning they have about 35 years of asset accumulation and potential investment earnings to rely on at retirement.

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However, Nationwide says, if workers started saving for retirement eight years sooner on average, they would have significantly more available for retirement income. The analysis steps through the example of a participant who is paid twice a month and contributes $50 per pay to an account that earns 6% annualized return on investment. If an employee starts this regimen at age 23, they can generate up to $88,572 more than if they started at age 31. At $100 per pay, Nationwide says, the difference would be $177,143.

“The difference is more than just added accumulation, of course,” the analysis says. “It represents the effect of compounding, the process in which an asset’s earnings are reinvested to generate additional earnings over time. All other things being equal, the more time a saver allows their assets to grow, the more compounded growth occurs. The growth can become exponential.”

According to the survey, workers are broadly aware of the power of compounding, and many say they are simply unable to save more and save earlier. More than half (61%) say debt has negatively impacted their retirement savings, from credit card debt to mortgage debt and student loans. Nationwide says workers also face higher costs for big-ticket items, which are rising faster than the overall inflation rate.

“For example, homes cost more,” the analysis says. “In the first quarter of 2018, the median sales price of existing homes was up 5.8% over the same period of the previous year. Rising interest rates and home prices have driven up mortgage rates and depressed affordability. Many potential buyers are also renting longer which is causing rents to rise at the fastest pace in two years.”

In addition, those who wish they could save more point to the rising costs of child care and health care.

Actions to take now

According to Nationwide, virtually all employees who are not already doing so, should start contributing to a retirement plan immediately. Those facing debt payments must also prioritize long-term savings, as difficult as this may seem.

“Employees may be able to reduce their student loan payments, accept a slightly later payoff and contribute the difference to their retirement savings account—allowing compounding more time to work,” the analysis says. “Individuals could reduce their monthly saving for a house down payment and contribute the difference to a retirement account. Doing so would delay reaching the down payment, but potentially only by several months rather than several years. Meanwhile, the saver would kick-start their retirement savings.”

Among other examples, the analysis considers a theoretical employee who is paying $500 a month on a 10-year, $35,000 student loan that charges 6% annualized interest. The terms of the loan require a minimum payment of $390.

“By repaying more than the minimum, she will save $10,594 in interest and cut the payoff period by 1.80 years,” the analysis says. “Or, she could contribute $55 per pay ($110 per month) to her retirement account by reducing her loan payment to the monthly minimum. In doing so, she would accumulate $16,267 for retirement over the 10-year period while paying $10,594 interest, a net savings of $5,673.”

The analysis also encourages younger workers to think about funding a health savings account (HSA), should their employer make one available.

“Let’s consider a hypothetical example of an employee capitalizing on the HSA triple tax advantage,” the analysis says. “Saving $20 per pay ($40 per month) into an HSA, he could have $26,920 after 30 years. If the employee increased his savings to $50 per pay ($100 per month), that amount could grow to $67,301. By increasing to $65 per pay, the employee could have an additional $40,000 of tax-free dollars—more than $100,000 total—to help pay out-of-pocket health care expenses that may arise in retirement.”

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