Market volatility can keep retirees up at night, but the biggest risk to retirement security isn’t what’s happening on Wall Street.
Instead, according to a recent research paper by Wenliang Hou of the former Retirement Research Center, the chance of living longer than expected and depleting your assets — what the financial industry calls “longevity risk” — is a greater risk to retirement security. threaten. Boston College.
The study, conducted before stocks entered a bear market last month, found that retirees felt overblown about market volatility. This is understandable, as research shows that people experience more pain from loss than joy from gain. Still, because they overestimate the likelihood of stocks going up or down, older adults also underestimate their longevity.
Retirees listed market volatility as the top risk, followed by longevity risk, and then health risk (potentially high medical and long-term care costs). However, the objective ranking puts longevity risk first, then health risk, then market risk.
The study is based on survey data from the long-running University of Michigan Health and Retirement Study, which surveys about 20,000 people over the age of 50 every two years. Hou then matched those responses to objective data on life cycles, healthcare spending and market volatility, which are measured by the Wilshire 5000 Total Market Index for stocks.
“Retirees don’t have an accurate picture of their true retirement risk,” Hou wrote in the paper.
This disconnect has real-world implications. If you don’t consider the possibility of longevity, you may prefer to apply for Social Security early rather than wait to maximize your benefits.
Many people plan to live as long as their parents, but new research suggests that genes account for less than 7 percent of lifespan. So it’s best to plan for the possibility of living longer than you expect.
For those born in 1960 or after, claiming Social Security when you fully retire at age 67 will receive 100% of the benefits you have received; benefits received at age 70 will be 124 of the benefits you received at full retirement age %; and applying at your earliest age 62 will result in benefits that are approximately 30% less than those at full retirement age.
For those born before 1960, the numbers are slightly different, but either way, if you can afford to wait, it’s worth the wait.
Social Security is the best inflation-adjusted annuity, but private sector annuities can also help ensure you don’t outlive your money. The simplest annuities are single-premium immediate annuities, where payouts for these insurance products rise as interest rates rise.
For retirees, longevity can be a double-edged sword. While it can test their savings, it also means market volatility isn’t as threatening as they fear. A 20-year investment horizon after retirement typically allows time to ride out short-term declines in the market.
“Don’t think about it,” says Daniel Hawley, a certified financial planner at Hawley Advisors in Walnut Creek, Calif. “You’ll feel better and the market will recover.” They always do. ”
Write to Elizabeth O’Brien at e[email protected]
Correct and enlarge
For those born in 1960 or later, claiming Social Security at age 70 will receive benefits equal to 124% of what you would get at full retirement age. An earlier version of this article incorrectly stated that this would be 124% more than what you would get at full retirement age.