Industry News

On July 5, 2022, the Center for Retirement Research (CRR) at Boston College released its issue brief, How Well Do Retirees Assess the Risks They Face in Retirement? The brief examines the numerous financial risks that retirees face during retirement including: outliving their money (longevity risk), experiencing investment losses (market risk), unexpected health expenses (health risk), the unforeseen needs of family members (family risk) as well as retirement benefit reductions (policy risk).

CRR discussed the importance of these risks and how retirees perceive them when making their consumption and investment decisions. The analysis found significant ranking variances between actual and perceived risks among retirees. For actual or objective ranking, retirees rate risk in the following order: 1) longevity; 2) health; and 3) market. By comparison, for perceived or subjective ranking, retirees rate risk in the following order: 1) market; 2) longevity; and 3) health. Based on these findings, retirees overestimate market volatility and underestimate how long they will live and their health costs.

According to CRR, “First, retirees do not have an accurate understanding of their true retirement risks. This finding highlights the importance of educating the public on the most significant sources of risk. Second, this analysis confirms the importance of longevity and market risk, underscoring the need for lifetime income either through Social Security or private sector annuities. Finally, long-term care is also a significant risk faced by retirees, but one they often underestimate.”

The analysis uses data from the Health and Retirement Study and involves constructing a lifecycle optimization model to quantify each risk by estimat­ing how much wealth retirees are willing to relinquish to insure against it.

The brief is available here.