Many may wonder if the decline in the stock market this year has permanently undermined retirement plans. The 21% decline in the first half increased anxiety. Compensating for such a big reversal is not easy.
However, according to a study by the Boston University Center for Retirement Research, the stock market plunge is not the main danger that should be associated with retirement-focused Americans. Rather, the other two problems can cause bigger problems. Unexpected medical expenses and running out of money.
The study found that planning for retirement was difficult due to the many risks that were difficult to estimate, including the three cited. There are also other risks the study describes as family risks, such as unexpected financial demands from the family, and the potential for reductions in retirement benefits, including social security (known as policy risks). I have.
The study was written by Wenliang Hou, a quant analyst at Fidelity Investments and a former research economist at the center. He assessed the major risks facing retirees and concluded that running out of their money was a major risk. He also said that most Americans seem to be paying attention to other places.
In other words, in his view, there is a gap between the risks perceived in retirement planning and the actual risks.
Rising inflation:Usually good news for savers is not so far
Things people should worry about
Based on the analysis of various research studies, Hou ranked longevity risk as a major retirement challenge, followed by unexpected health care costs, and market risk. In addition to equity volatility, the latter also includes the possibility of falling home prices.
He put family risk fourth. This can include divorce, spouse death, or the financial implications of an adult child in need of a handout. Next, policy risk arose. This mainly reflects the danger that social security severance benefits could be reduced by 20% to 25% by 2035. At that time, if Congress does not support it, it is expected that the program’s current surplus, the trust fund’s assets, will run out. The system before that.
Hou devised these rankings based on several sources, including life expectancy tables, historical stock market and housing volatility indicators, health care data, and family mobility surveys. Or friends.
Are you saving enough to retire? :Try these creative options even when inflation is rising
What people worry about instead
But these rankings are inconsistent with what Americans say they are more worried about. The public ranks market risk at the top, followed by longevity and health risk. Second, there are family and policy concerns.
To determine this, Hou relied on the answers from the Health and Retirement Study, a bi-annual survey of approximately 20,000 respondents over the age of 50. Comprehensive research covers topics such as healthcare, housing, wealth, pensions, employment, and disability.
According to Hou, some important findings are that Americans, including retirees, tend to underestimate the length of time they may live and underestimate the cost of health care in later years. .. Both factors can cause people to run out of money.
One of the interesting discoveries about medical costs is that expectations remain almost unchanged as respondents grow older. This suggests that “elderly people underestimate medical costs and younger people overestimate it,” he wrote.
Unexpected out-of-pocket medical expenses may include insurance premiums, medicines, hospitalization, nursing home care, visits to doctors and dental offices, and more. Fidelity estimates that a 65-year-old couple who will retire this year will need to plan a total out-of-pocket medical expenses of approximately $ 315,000 for the rest of their lives.
Overestimate investment risk
Another important finding: Americans and retirees tend to exaggerate stock market volatility and consider long-term price fluctuations to be more serious than they really are.
The Health and Retirement Study asks a variety of questions about how Americans perceive stock market risk. The main question is whether respondents think next year’s stock price is more valuable than it is now. Other than that, you could get or lose 20% or more next year.
“Overall, an individual’s expectations of volatility are much higher than the actual return volatility,” Hou wrote. Using the wide Wilshire 5000 index as a guide, he said annual earnings tend to bounce between 20% and -20%, but generally remain positive.
Like the stock market reaction, he added that Americans tend to overestimate the volatility of home prices.
Dealing with retirement obstacles
A Boston University study did not provide many severance plan proposals, but the treatise emphasized the need for greater education.
Hou also cited a source of lifetime income as a possible solution. These may include pensions or social security that primarily serve as pensions. Predictable income with COLA and living cost adjustments, especially social security, helps retirees avoid stock market risk while at the same time hedging the likelihood that a person will live longer than other sources of income. Useful for.
For more advanced education, two obvious examples are related to stock market risk and life expectancy. Young retirees around the age of 65 may not expect to live in the 80’s, 90’s, and perhaps beyond, but the overall probability suggests that most people do. As a result, young retirees can still be expected to have a relatively long investment period of over 20 years, Hou said. This is important because equity risk tends to disappear over time.
According to JP Morgan Asset Management, since 1950, the market represented by the Standard & Poor 500 index has fallen by 39% in a year. However, in a 10-year rolling period, the worst loss is 1%, and the market has never recorded a negative return in the 20 years within that period.
The resilience of the stock market is noteworthy, especially for those who are worried about long-term financial damage to their retirement, especially during today’s tough years.
Contact the reporter at russ.wiles@arizonarepublic.com.
Support local journalism. Subscribe to azcentral.com today.
