Data & Research October 19, 2006

Retirement Spending Patterns Vary

A recent study, "Spending and Investing in Retirement" by LIMRA and the Society of Actuaries offers insight into how people determine they are ready to retire and how they are faring in retirement.
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A recent study, “Spending and Investing in Retirement” by LIMRA and the Society of Actuaries offers insight into how people determine they are ready to retire and how they are faring in retirement.

The study found that retirees were spending more in retirement than they did beforehand. The post retirement cost participants most often overlooked are the rising costs of prescription drugs and gas, although the two greatest concerns among participants were — high medical expenses and long-term care expenses. Many of those surveyed do not have long-term health coverage, with most of them feeling as though they can’t afford the premiums. One female retiree 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.’ Interestingly, outliving assets was ranked last in the importance of six concerns by the retirees.

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Retirement No Allocation “Trigger’

For most of the participants, retirement did not prompt a change in investment allocations, but some, mostly prompted by handing their money over to advisers, did shift more into equities. Those who adopted more conservative strategies generally said they were attempting to shield their nest eggs from market volatility, according to the report.

Many of the participants said they withdrew money from nonqualified plans and left their 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 those had done so only at the suggestion of an adviser. Many of the participants thought they could do a better job of managing their money than insurance companies, though 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.

The study was based on a focus group of retirees, who were between two and 10 years into retirement, with at least $100,000 of investable assets and who depended on that money to maintain their lifestyles because they lacked sufficient amounts of annuitized income from Social Security and defined benefit plans to meet all of their expenses.

Data & Research October 19, 2006

Markets, Medicine Dominate Retirement Concerns

A new survey finds that retirees are most concerned about the impact of the investment markets and an unexpected medical issue on their post-career standard of living.
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A new survey finds that retirees are most concerned about the impact of the investment markets and an unexpected medical issue on their post-career standard of living.

Those were the most commonly cited concerns among retiree households, according to “Converting Retirement Income Planning Into Practice: Fulfilling the Needs of Current and Future Retirees,” a recent survey conducted by the Financial Research Corporation (FRC) and Synovate’s Financial Services Practice. Those concerns dominated even though they can readily be addressed with investment and insurance products – even among those who have invested in such products, according to FRC. Still, only 20% of retiree households in which the couple or individual had been retired from a primary career for three years or more and had at least $100,000 of investable assets, owned a fixed annuity, while 18% owned a variable annuity.

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Older retirees were more likely to own annuities than younger retirees, while widowed retirees were the most likely of any group to own them. Of those who did purchase annuities, the top reason they were purchased were for the guaranteed death benefits; the second most common reason was for the guaranteed income. However, of those who did purchase annuities, 17% indicated they did not fully understand the value of owning an annuity, meaning advisers might need to spend some more time explaining investments to some clients to ensure they are aware of, and comfortable with, what they are purchasing.

The survey authors noted that annuities can offer increased assurance to retirees because they create a pension-like payment and that receiving a pension in retirement is highly correlated with increased confidence, comfort, and security. Moreover, the survey reports that those receiving pension payments in retirement have higher average incomes than those without and that they tend to draw down less income from other investments.

Gender Impacts

Women are three times as likely as men to be going through retirement alone, and FRC said that women tend to find most financial tasks to be more difficult than men, including determining appropriate levels of income to take. They have also evidenced a preference for full-service advice and guidance platforms.

FRC said that retirees place their assets into an average of 4.3 different investment types, with the most common being checking/savings accounts, stock and bond mutual funds, and individual stocks. Yet, when retirees own less commonly available investments, such as separately managed accounts (SMAs), they tend to allocate a sizeable portion of their portfolio to them. For example, just 14% of retirees own SMAs, but they allocated an average of 30% of investment assets to that product – demonstrating a potentially significant opportunity for advisers to educate and direct clients in their purchasing of investments.

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