New Study Says Retirees Are Worried About the Wrong Things

July 6, 2020 — A new study focussed on the financial issues that retirees should really be concerned about, and then it measured what they actually worried about. The results are interesting – it seems like many people are downplaying the risks that should concern them, like how long they will live, and instead concentrating on issues that are less worrisome, such as market risk.

In “How Well Do Retirees Assess the Things They Should Worry About“, the researchers used a host of data from various sources to measure 5 areas of concern for anyone in retirement. Then they ranked those risks in order:

Actual Financial Risks

1. Longevity. The worry should be that you will live longer than expected and run out of funds.

2. Markets. That a disintegrating stock market of other economic catastrophe wipes out retirement savings. Being priced out of the housing market would be another.

3. Health. The fear that you or a spouse will get seriously ill and require hospitalization or long term care needs. That could create high out of pocket expenses, along with ruining the ability to enjoy retirement.

4. Family. The someone in the family will get divorced, die, or economic troubles – which could in turn require the retiree to transfer significant amount to help them out.

5. Policy. The main risk in the policy area seems to be Social Security. Particularly if Congress fails to act on replenishing the Trust Funds before 2035, those receiving benefits could see significant cuts and experience a decline in their lifestyle.

Perceived Risks:

When the researchers asked people over 50 to rank how they felt about these risks, this was the ranking order:

1. Markets. The study asked people to rate if the stock market would be higher or lower next year, the probability of gaining or losing more than 20%, and house values. People significantly overrated the actual market risk from a historical perspective.
2. Health and Medical Expenses. Respondents were asked the probability of spending various amounts for health care expenses in the coming year. As people aged, they tended to seriously underestimate how much the objective data says they should expect to pay.
3. Longevity. Subjects were asked to rate the probability of living to various ages. They almost always assumed they would die before their actuarial likelihood. For example, 64% of the women aged 65-69 assumed they would live to age 80, while the actual probability is 75-78%.
4. Family. They were asked to rate how likely they would have to transfer $5000 or more to a family member in the next 10 years. Most subjects under-rated how likely that would be.
5. Policy. This question was to rate the risk of a significant cut to Social Security in the future, and about 40% expected that cut. Thanks to our dysfunctional Congress, at this point no one knows the real answer to that question.

Bottom line – Longevity is the most crucial disconnect

A comparison of actual risks vs. perceived risks shows that even though people often have an incorrect idea of the risks, they rank most of them in roughly the right order. The biggest disconnect, however, is longevity, and that could have serious consequences. Longevity is the biggest actual risk, but people ranked it only as #3 . Single men seemed to have some of the worst predictions – their actual concern for longevity should be about double their perceived risk (27% vs. 15%). What this means in practice is that people are at risk of spending down their savings too fast, ending up with nothing to live on but Social Security in their later years. To the same extent, their underestimates on other issues like the likelihood of family transfers and medical expenses could also cause trouble. It looks like folks can at least worry less on financial risk.

About the study

This study mainly used data from the Health and Retirement Study (HRS), a biennial longitudinal survey of a representative sample of U.S. households over age 50.

Comments? Ask yourself the probability of you experiencing these risks, and compare the results to the actual. If you are underestimating how long you are going to live or how much you might have to spend for medical or long term care expenses, perhaps you should re-evaluate your retirement budget! Please comment in the section below.