Planning for retirement is tough even in the best of times, and it has become even more challenging in the face of the Covid-19 pandemic. A recent study by Shwab Retirement Plan Services found that 41 percent of 401(k) survey participants have made changes to their 401(k) plans as a direct result of the coronavirus.
The survey’s results also showed that pre- and present retirees perceived retirement risks differ from their actual risks. Research economist Wenliang Hou of the Center for Retirement Research at Boston College analyzed five major sources of risk faced by a typical retiree:
- Mortality or longevity (living longer than expected and running out of money)
- Market (bad stock returns or a decline in housing values)
- Health (unexpected medical expenses and long-term care costs)
- Family (death of a spouse or unforeseen needs of family members)
- Policy (such as a Social Security benefit reduction)
Hou’s empirical analysis found the biggest risk faced by retirees is longevity, followed by health risk, market risk, family risk and policy risk. On the other hand, pre- and present retirees subjectively ranked market volatility as the highest risk, followed by longevity risk, health risk, family risk and policy risk.
Hou said the discrepancy between perceived and actual risks shows the need for better education of pre- and present retirees, so they can make planning decisions based on their actual risks. Hou also points out the need for the creation lifetime income products such as annuities, which can offset longevity and market risk, and he recommends development of public and private programs that protect retirees from the risks posed by long-term care.