Retirement, the last phase of life, is undergoing dramatic change. These changes are affecting how long people spend in retirement, how retirement is funded, and what it means to be retired. While recent evidence suggests the median retirement age has levelled off and may have begun to increase,
the median retirement age declined by around five years during the latter half of the twentieth century. At the same time, people are living longer. This results in people spending more time in retirement than in the past. Fewer employers are now offering post-retirement benefits such as pensions and health insurance.
With longer retirements and fewer employer-provided post-etirement benefits, individuals are by necessity becoming responsible for a growing share of their retirement funding. However, it is not simply a matter of having enough resources, but also how they are utilized. Consideration must be given to the many risks retirees face; risks that were previously less prominent or were mitigated by employer-provided programs. These risks include, but are not limited to:
- Longevity: Retirees must now ensure their assets will last as long as they do. While Social Security provides workers with income for as long as they live, employer-provided retirement benefits are increasingly being paid out in a form that does not guarantee a lifetime income.
- Inflation: While inflation has been modest in recent years, even modest inflation can have a profound effect on purchasing power when compounded over many years. Social Security and many public employee retirement systems increase benefit payments to retirees annually to reflect inflation, but private pension plans generally do not.
- Investment: With an increasing share of responsibility for retirement funding and longer investment horizons, retirees often invest a portion of their assets in equities, subjecting them to market risk. When previous generations of retirees invested in equities, it was less likely that they needed to rely on these funds as today’s retirees must. Another investment risk is interest rate risk.
A common strategy of people who retired a decade or two ago was to invest their retirement assets very conservatively in fixed income products such as certificates of deposit or fixed rate annuities. They saw their income decrease upon renewal of these products as interest rates declined since then.
• Health: A focus is needed on both acute care and long-term care. Retirees bear the cost of health care and coverage up to Medicare eligibility and after Medicare eligibility, of Medicare supplement and/or other private health insurance, and any costs over and above what these programs cover.
The rapidly escalating cost of health care and prescription drugs will continue
to strain retirees’ limited resources going forward. While Medicare covers a small part of long-term care, most long-term care is not covered either by employer sponsored health plans or Medicare. An extended period of long-term care needs can decimate even a fairly substantial nest egg, and providing for long-term care is a major issue for many individuals.
The very nature of retirement is also undergoing change. It is no longer standard to stop working altogether and retire. More and more people are retiring gradually, or in phases. In doing so, they are remaining actively engaged in the workforce, perhaps part time, through volunteerism, or even
All of these factors are making it more difficult for people to plan their retirement. LIMRA, the Society of Actuaries (SoA), and the International Foundation for Retirement Education (InFRE) decided to work together to find out what computerized tools are available to help retirees with their planning. The goal of the research was to determine how prevailing programs treat the retirement phase and, more specifically, how they treat retirement risks.
This report reviews retirement planning software programs currently available to individuals and their professional advisors. Such programs can help individuals decide how much to save toward retirement, how to invest these savings, when they can afford to retire, and how to manage their
financial affairs after retirement. We selected a total of 19 programs for analysis. Six of the programs are available for consumer use, 11 are available for professionals or their firms to help in developing plans for their clients, and two are proprietary programs developed by large planning firms.
We developed six case studies to help test the programs and their capabilities. The cases represent a range of situations from pre-retirees to
retirees, married couples to individuals, financially not so well off to fairly affluent, and included a variety of special situations and issues.
This report does not rate or recommend specific programs. Rather, it explains how programs that are currently available work, and what features can be improved. This presentation should assist individuals and their advisors in choosing the kinds of programs that will be useful, and encourage software firms and financial institutions to improve the software they make available.
As a result of this research, we hope that:
- More people will plan well for retirement
- People will analyze their options and understand the tradeoffs available to them
- Actuaries will improve the methodology available for planning, and
- Tools will be improved to better handle risks
- Combined, the tools analysed have an extensive list of features and capabilities. Their value is in helping people estimate income, retirement needs, and spending.
- The programs are generally not developed to address retirement risks. Instead, the tools mainly mask risk. That is, the calculations may use average figures to represent an individual’s future life span, the expected rate of inflation, etc. Because actual experience will vary widely around the averages, in practice such calculations may suggest a plan for retirement which some individuals. Proprietary programs are developed by planning firms, usually for exclusive use by the financial planners they employ. can’t afford. For example, in selecting a time horizon for the analysis of twenty years, a program may provide a false sense of security if the results show the financial resources sufficient to provide required income over that time, when in fact their resources may not last much longer. Because of the lack of risk treatment, it is important to run multiple scenarios.
- The programs varied greatly on their inputs and how to treat various situations. For example, the handling of home equity ranged from no treatment to programs that automatically withdrew income from the home each year. It was difficult to accurately portray each case study in any program or to do so consistently across programs.
- Because of the variety in the programs’ inputs, capabilities, and results, direct comparisons of a wide range of results was impossible. However, there is tremendous variability across programs regarding when the assets ran out, if at all.
- With results that vary across programs, it is recommended that, where possible, consumers or financial professionals working with them run multiple programs and use multiple scenarios within each program.
- These programs are merely tools to help facilitate the retirement planning process and there is no right answer. Nor is there any general agreement on the right answer or how to arrive at it. The results from any program should not be used as the sole input for decision making for retirees or prospective retirees. It is very likely that professionals using these programs consider many of the issues raised in this report and may also do so out of recognition of the limitations of the program(s) they have chosen to use