Managing Mid-Market Retirement Risks

Betty Meredith, CFA, CFP®, CRC®, Director of Education, and Research, InFRE

Betty Meredith, CFA, CFP®, CRC®, Director of Education, and Research, InFRE

By Betty Meredith, CFA®, CFP®, CRC®

The financial industry generally classifies a client’s risk tolerance by their capability to assume investment risk. When retirement planning for the mid-market, retirement counselors need to prioritize a client’s ability to protect against the additional primary risks of inflation, longevity, health and long-term care before they plan for their investing risk tolerance.

A large segment of our current and future retirees is on the precipice of outliving their money, and in general, they are not getting the help they need from the financial planning industry. This is because most middle mass and middle affluent boomers do not have the wealth that gives them room to maneuver in retirement, and most advisors target higher net worth clients. Retirement counselors who take the lead in shaping the use of retirement income planning processes, products, platforms and practice management solutions for this market will benefit, as will an entire generation of boomer retirees.

Top Retirement Risk Concerns of Consumers

In 2001, the International Foundation for Retirement Education (InFRE) began participating in a series of biennial surveys called the Risks and Process of Retirement Surveys by the Society of Actuaries’ (SOA) Committee on Post Retirement Needs and Risk in order to support creation of a body of research to help advisors better serve retirement needs of mid-market consumers. These surveys are conducted by Mathew Greenwald and Associates, Inc. and the Employee Benefit Research Institute (EBRI) on behalf of the SOA, to evaluate how aware American pre-retirees and retirees, ages 45 to 80, are of retirement risks, how that awareness has changed over time, and how that changing awareness has affected how they manage their money. The surveys also identify important aspects of consumers’ functional retirement literacy: What do consumers know and do about managing their retirement risks?

In the 2009 Survey:

  • 804 interviews were conducted in July, 2009 lasting 20 minutes on average.
  • The sample data is weighted by U.S. Census Bureau total population estimates.
  • Only 3% of retirees and 5% of pre-retirees who responded to the survey had $1m or more in savings, and 6% of both had $500k-$1m; thus the results of this study primarily reflected the decisions made by non-high net worth individuals. [However, the top concerns from this survey match results of another 2010 study that measured the top retirement concerns of the affluent (see below).]
  • As in prior years, pre-retirees are much more concerned about retirement risk than retirees.
  • The top two principal concerns of both pre-retirees and retirees for 2009 are maintaining purchasing power of investments and health care costs, consistent with prior years’ studies.
Top Retirement Risk Concerns      
  Affluent Retirees Pre-retirees
Inflation eroding value of assets 55% 58% 71%
Healthcare expenses 49% 49% 67%
Outliving assets 47% 47% 58%
Maintain standard of living 45% 56%
Not enough money for long stay in nursing home 46% 55%

It’s worthy of note that the top retirement concerns of affluent retirees mirror those of the general U.S. population; more or less money doesn’t change the perception these are risks to be addressed and are a practical starting point for discussions with either affluent or mid-market clients.

Inflation risk

Maintaining the value of savings and investments with inflation is the highest priority item for both pre-retirees and retirees. It is good to see this message has gotten through, as this topic is widely addressed in 401(k), 457 and 403(b) employee education programs, as well as in the media. However, once in retirement, converting these assets into inflation-protected income requires a different approach than used during the accumulation years.

What are retirees doing to manage inflation during retirement? Because they have conflicting goals and tradeoffs – such as investing to be conservative to preserve asset value as well as investing to preserve purchasing power – they’re doing what they can readily control: cutting back on spending. Among choices of actions offered during the survey as means for protecting themselves against the risks of retirement, both pre-retirees and retirees favored reducing debt, cutting spending, and increasing savings. The primary asset management tool for preserving purchasing power – investing a portion of money in stocks or stock mutual funds – was fifth on the list. Fewer retirees are paying off their mortgage than in the past (48%, down from 56%), which will put additional pressure on their income needs during their earlier years of retirement.

What can we do as retirement counselors to help retirees manage inflation risk? The obvious is to be sure that the retirement income solutions and long-term care products we recommend have inflation riders or protection built in (like TIPS), and opportunity for growth to fund their retirement segments 20 and 30 years in the future.

Health care

About half of the retirees and two-thirds of the pre-retirees express concern about having the funds needed to pay for adequate health care. Both, however, are more likely to try to save for long-term care costs (self-insure) than purchase insurance, though half of pre-retirees have already or intend to purchase long-term care insurance compared to one third of retirees.

What are pre-retirees and retirees doing to manage their health care risks? The good news is they realize the role their own behavior plays. There was a 10% increase from the 2007 survey in the number of retirees (84%) and pre-retirees (79%) that state they were already maintaining healthy lifestyle habits such as proper diet, regular exercise and preventive care.

What can we do as retirement counselors to help? Health and long-term care costs are the retirement wildcards. The problem is that the longer a person lives, the longer they live — which means healthy retirees typically experience higher health-related costs during the course of retirement than unhealthy retirees because they have more years of expenses to cover. We can regularly remind clients that taking care of their health is something they can control and that can have big payoffs in terms of both lowering their out-of-pocket healthcare expenses over the long-term and increased quality of retirement, especially if the client plans to rely on human capital (earned income) during the first phase of retirement. Studies show the relationship between good health and leisure-time physical activity is particularly strong for seniors; 67% percent of seniors who are active three or more times a week are in good health, compared to 36 percent who are infrequently active. Participating in regular physical activity is also associated with improved odds for staying healthier over time and for recovering more quickly from poor health. Even modest reductions in inactivity levels can substantially lower health costs.

Inflation-indexed combination products that can help retirees transfer the risk of healthcare shocks need to be carved out of retirement investment plans when it makes sense.

These products combine life insurance with a long-term care benefit rider, or an annuity with long term care insurance. As of 2010, the Pension Protection Act permits tax-free distribution of life insurance or annuity cash value to pay for long-term care. These combination products also address a common objection by consumers to standalone, long-term care insurance — premiums not being wasted if they never need long-term care.

Longevity Risk

The 2001-09 SOA studies demonstrate people don’t plan well for longevity risk. Behavioral finance finds that thinking through the consequence of immediate rewards for a potential future outcome isn’t a natural response for most people. In the SOA study, retirees typically plan for only five years into the future, and pre-retirees plan for 10 years. In general, they also believe their money will last if their savings are managed well during their first three years of retirement.

With that short term outlook in mind, what are people doing in the mid-market to manage longevity risk? They’re self-insuring. Only 20% of pre-retirees and retirees have purchased a product or chose a retirement plan option with guaranteed income for life.

What can we do as retirement counselors? Besides using fixed or variable income annuities to create a floor that covers essential expenses, longevity insurance annuities, also known as deferred income annuities (DIA) will become a staple of retirement income plans for the mid-market. Today these products are purchased at retirement and begin paying a life-contingent guaranteed income at a pre-determined date in the future. For example, a 65-year-old might buy a non-inflation indexed, single life DIA for $50,000 that provides an annual income of $40,000 at age 85. By using this type of product to address ages past average life expectancy, a plan can be created for getting the rest of the retiree’s assets through to this date instead of trying to manage assets and income to some future unknown point in time.

Thrive® is a company in Iowa that maximizes the use of DIAs through an income distribution system that works as follows:

  • Splitting the client’s income stream needed into designated time period “buckets”
  • Utilizing products such as a single premium annuity or DIA to minimize present value of assets required to guarantee each bucket of income
  • Maximizing assets not needed for annually-increasing income to replenish and grow the portfolio.

A Risk We Don’t Usually Think About: Retirement Illiteracy

There is a persistent disconnect between when workers plan to retire and when they actually do. Four in 10 retire before they plan to and in many cases retire with little or no preparation for the financial consequences. Perhaps, then, the greatest retirement risk the mid-market has is lack of information and resources to help them make informed decisions before they actually retire.

The following chart shows not much difference between pre-retirees’ and retirees’ opinion of how each of these actions might affect financial security in retirement.

 Health care aside, retires and pre-retirees don’t see much value in taking any of these actions, which is tied to the fact they don’t know what they don’t know, along with their tendency to focus on less than a 10 year time horizon when planning for retirement. As retirement counselors we know that a pre-retiree who is physically and emotionally able to can tremendously increase their quality of life in the later years of retirement by delaying receipt of Social Security and withdrawals from retirement savings.

Retirement education for the mid-market needs to be holistic about how to prioritize and manage the risks they’ll face in key areas of retirement planning so they improve the sustainability and income optimization of all their assets ─ Social Security, pensions, savings and investments, home equity, and even human capital such as their health and ability to work. Most importantly, they also need to understand which risks they can afford to assume, and which ones they can’t.

Market Risks

Market risks are not going to be covered now in this article, as retirement income and asset allocation strategies that manage market risks for the mid-market is a topic that deserves its own article in the future. A lot of research has been done on managing systematic withdrawals and market risks in retirement, but more is needed to create easy to implement income solutions for the mid-market, such as identifying how to use annuities and other insurance products along with managed assets to increase the sustainability of mid-market income portfolios.


In sum, retirees and pre-retirees are not using financial and insurance products as they should to manage or transfer their retirement risks. They’re choosing to self-insure or work on things they can control and understand like reducing debt, cutting spending, taking better care of themselves, etc. in order to improve the sustainability of their retirement income and assets. Nonetheless, even many of the most highly motivated clients don’t have the retirement literacy they need to ensure their resources last as long as they do.

Effective retirement risk management for the mid-market requires a coordinated effort from key stakeholders: government, product companies, employers, advisors and education for consumers with assets less than $500k in retirement savings. We need more applied research that can flow through to software models surgically-targeted and optimized outcomes for the mid-market’s primary retirement assets of Social Security and Medicare, pensions, defined contribution plan and IRA assets, personal savings, home equity, and even human capital. We need to increase the use of insurance products to transfer the risks of retirement and protect the quality of life for the majority of our retirees.

One last request: Will the Department of Labor please expand the definition of financial advice in the workplace from only investment advice to also encompass retirement planning advice, as the retirement security of millions of America’s workers also depends on their ability to make informed retirement timing and income decisions?

A shorter version of this article was published as “Managing Retirement Risks for the Mid-Market,” in the Journal of Financial Planning, April, 2011.

Betty Meredith, CFA®, CFP®, CRC® is the Director of Education and Research for International Foundation for Retirement Education (InFRE), and Managing Member of the Int’l Retirement Resource Center, LLC.

iSegmenting The Middle Market: Retirement Risks And Solutions Phase I Report, Society of Actuaries, 2009
ii Affluent households with $1m+ net worth, not including primary residence, 2009 Phoenix Wealth Study
iii Affluent households with $1m+ net worth, not including primary residence, 2009 Phoenix Wealth Study
iv Pre-retirees and retirees with net worth and income characteristics in line with those for Americans as a whole, 2009 Risks and Process of Retirement Survey Report of Findings, sponsored by the Society of Actuaries, prepared by Mathew Greenwald & Associates, Inc. and Employee Benefit Research Institute, March 2010
v 2009 Risks and Process of Retirement Survey Report of Findings, sponsored by the Society of Actuaries, prepared by Mathew Greenwald & Associates, Inc. and Employee Benefit Research Institute, March 2010
vi Physical Activity and Healthy Aging, Public Health Agency of Canada,

©2011, Betty Meredith. All rights reserved.

Posted in: Medical and Long-term Care Planning, PROTECT the Plan from Retirement Risks, Retirement Income Planning and Spending

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