Many people don't do much planning before deciding to retire, and they use simplistic strategies to deal with financial risks. As a result, they're vulnerable to the risk of financial shocks that may cause them to struggle financially in their later years.
That's the conclusion of a recent study conducted by the Society of Actuaries together with Matthew Greenwald and Associates. The two organizations conducted focus groups with current retirees to learn how Americans go about planning for their retirement.
The study came up with six key findings that can serve as warning signs: If the first five sound like something you might do, consider devoting more time and attention to your retirement planning.
Finding 1: Many people feel pushed out of work. It's often assumed that people retire because they want to stop working to pursue other interests or because they've carefully calculated that they have enough money to be financially secure for the rest of their lives. But that's often not the case. Many people leave work for a variety of reasons, including health issues, the need to take care of a spouse or relative, not feeling valued and welcome at work, or losing a job involuntarily.
Recommendation: You'll do better in retirement if you have activities that you enjoy and if you do the math to make sure you have enough money to make it through a long retirement. Consider the possibility of finding some work you like doing, or try to fix any problems at your current job. Even if you feel like you're being pushed out or you're not valued at work, you're still in control of when you retire -- unless, of course, you get laid off.
Finding 2: Planning for income is too simplistic. Many people retire after simply calculating that they presently have enough income from Social Security, part-time work and a working spouse to pay for basic expenses or somewhat more. Very few consider the possibility that inflation could increase their cost of living or that income from work might not last indefinitely.
Recommendation: Do some calculations to factor inflation into your living expenses and the likelihood that income from work will last for just a few years.
Finding 3: Not much planning is being done for financial risks. Many people discount the value of planning because "anything can happen." The most common strategy for dealing with unexpected events, such as running out of money or health shocks, is to adjust to events as they happen.
Recommendation: It's a good idea to take steps to protect yourself ahead of time against common financial shocks in retirement, such as a stock market crash, poor health, the death of a spouse or the need for long-term care. While that's easier said than done, it will surely help if you spend time learning about what you should do to protect yourself.
Finding 4: Most people claim Social Security earlier than seems optimal. They might acknowledge and understand the advantage of delaying Social Security benefits, but they may claim benefits early anyway, often because "you never know when you'll die."
Recommendation: Delaying Social Security benefits is one of the smartest moves most people can make, both to maximize their lifetime income and protect their spouse. To help delay your Social Security benefits, consider finding part-time work that pays what your Social Security benefits would have been, or, if necessary, draw these amounts out of your retirement savings. Yes, "anything can happen," but plan for what's most likely to happen, which is that you and your spouse or partner will make it into your 80s or even your 90s. The odds are very good that you won't die soon after you retire.
Finding 5: Many people hang on to assets. They try to maintain their home equity and retirement savings, and they're averse to reverse mortgages and systematically drawing down retirement savings, such as using the four percent rule or buying an annuity. They want to keep these assets in reserve as a buffer against an unexpected shock to their financial situation, such as an expensive medical condition or the need for long-term care.
Recommendation: Learn about methods of protecting yourself against common financial shocks. For instance, you can protect against health care shocks through Medicare and some type of supplemental medical insurance. You can protect against long-term care needs through insurance, but if you don't buy long-term care insurance, maintaining your home equity is a good move. Determine how much savings you need as an emergency cushion, which hopefully will free you to use the rest of your savings to generate income through a systematic withdrawal method, an annuity or some combination of the two.
Finding 6: Many retirees are satisfied and don't feel deprived. In spite of the challenges described above, many people are living carefully, matching expenses to income and prudently managing their assets. They're willing to cut back on living expenses in the future if necessary. They may struggle down the road, but they're OK for now.
This last finding shows that many current retirees aren't in a crisis mode, as is commonly thought. However, even their lives could be improved, and they could be more financially secure if they made some time to learn about the key issues facing them in retirement and then took steps to plan.
This isn't always quick or easy, but it's well worth the effort. My free online retirement planning guide is a good place to start, offering tips and help with all of the issues mentioned above.