Poor Planning

Little thought bent toward retirement

Many of the participants in a focus group of retirees have not done the math to gauge how much they will need in retirement. 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. Particularly, the authors of the survey wanted to know how the retirees, who were between two and 10 years into retirement, made the decisions on their retirement date, how much they needed to save, and how they plan to allocate their money in retirement.

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 largely depend 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.

The post-retirement costs 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 actually shows that 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.” While many of the group members lacked the financial foresight to consider market effects, they we are reluctant to ask for advice.

A Lesson in Poor Planning

Very few of the participants did extensive financial planning prior to deciding when to retire and had given little consideration to 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 when they wanted 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 could meet their monthly expense responsibilities, rather than sitting down to calculate 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 their 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.

If, on the other hand, retirees became more conservative with their investments, they likely sprang 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 did not withdraw a set amount of money each month, but 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 had purchased annuities, and even those only did so on 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.

Unanticipated Costs

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 it, but I don’t think it’s practical to spend thousands of dollars a year on something [long-term care insurance] that may happen.”