The old line about retirement goes something like: “My problem is not that I have too little money left at the end of the month, it’s that I have too much month left at the end of the money.”
For many people, though, the real issue could be having too little money for the amount of life they have.
That’s called “longevity risk” and if there’s one form of risk to your retirement security that you’re underestimating, it’s that. That’s according to a recent report by the Center for Retirement Research, which found that longevity risk is statistically the greatest of the various risks that retirees face—although retirees most commonly perceive “market risk”—the potential for investment losses—as the biggest.
Other risks examined in the study include those of unexpected health expenses, unforeseen needs of family members, and benefit cuts—which it called health risks, family risks and policy risks, respectively.
“Retirees must make decisions based on their beliefs about future events, which are represented by subjective risk distributions. These beliefs often deviate from the distributions in the empirical data,” it said.
The Social Security, FERS / CSRS Factor
A few points for context. First, on the income end: anyone eligible to draw benefits from a program such as Social Security, FERS or CSRS will not completely run out of money no matter how long they live. Not only do those programs pay benefits for life, the benefits are also fully (Social Security and CSRS) or largely (FERS) protected from inflation.
Federal retirees in that sense are relatively well off compared with the private sector, where ever-fewer numbers of employers provide such defined benefit retirement programs such as FERS and CSRS. For many of those employees, Social Security alone constitutes the only source of guaranteed income for life.
Second, on the life expectancy figures: that data tends to be several or more years old by the time it is collected and analyzed. The overall trend for many years has been for more people to live longer—that’s one of the issues underlying Social Security’s long-term financial problem—due to advances in medicine, the shift toward jobs that are less physically dangerous, and other factors.
However, some more recent and less extensive data show that trend stalling or even reversing, for reasons including deaths due to illegal drugs—notably illegal use of opioids and similar compounds—suicide and the effects of higher rates of obesity.
That said, the report cited survey data showing that individuals overall underestimate their chances of living to an advanced age. For example, it said, the average life expectancies for men and women at age 65 in 2020 are 84 and 86 but in surveys the average estimates of personal life expectancy from that age were only 77 for men and 78 for women.
What’s the Market Going to Do?
Regarding market risk, “individuals on average have very pessimistic and larger volatility expectations than the empirical data indicate, and the pattern is stable by gender, age, and survey years.”
For example, majorities in each of four surveys conducted in 2010, 2012, 2014 and 2016 thought that stock markets would be lower rather than higher in the following year, and more thought markets were more likely to be down by 20 percent or more than thought they would be up by 20 percent or more. Estimates of average annual market gains also were below actual results, it said.
It said that after longevity risk, health risk actually is the second largest, and one that is widely underestimated, adding that 70 percent of adults who survive to age 65 will need at least some long-term care services.
Such mismatches could have implications for how retirees manage their financial resources, it said, which is especially important given the increased emphasis in recent years on personal savings for financial security in retirement.
For example, it said, low estimates of life expectancy may be a factor explaining low rates of purchasing annuities with retirement assets, and under-estimation of potential health risks could similarly contribute to low rates of purchasing long-term care insurance.
Does that play out in the federal workforce, with its defined benefit retirement programs as an underpinning that many others lack? Yes it does.
For example, look at withdrawal patterns in Thrift Savings Plan accounts. The main options, which can be combined, are to take lump-sums, installment payments or to use some or all of an account to purchase an annuity.
In the annuity option, the designated amount of money is turned over to the annuity provider—which has been MetLife for many years—and which offers various sub-options including survivor benefits, increasing benefits, and others.
But the main advantage of an annuity is that it will pay for life (it also shifts the pressure of managing the money from the individual to the company, also for life). Once money withdrawn in lump-sums or installment payments is spent, it’s gone.
However, the annuity option is by far the least-used of the TSP withdrawal options, chosen by only around 2 percent of account holders.
The TSP does not recommend any of its withdrawal options per se, but it is worth noting that it uses the potential monthly annuity value to help investors understand how much—or little—their accounts will fund their retirement.
Federal Long Term Care Insurance Program – FLTCIP
Another little-used option available to federal employees is the Federal Long Term Care Insurance Program, which while at the enrollee’s sole cost does come at favorable group rates. As OPM noted in the recently released Federal Employee Benefits Survey, the FLTCIP “continues to be one of the most under-utilized benefit programs available to federal employees, with only eight percent of FEBS participants indicating that they were enrolled . . . Low enrollment in FLTCIP is consistent with industry trends.”
OPM noted that 42 percent of employees said they considered the FLTCIP program important or extremely important to them. That’s in contrast to nearly 100 percent who said that of the TSP and their FERS or CSRS defined benefit.
However, OPM also noted that the number of employees who rate the benefit so highly is more than four times the number of those who actually have enrolled in it.
“The discrepancy in importance ratings vs. reported enrollment is consistent with the nature of the benefit since the future necessity of the program is unknown for most employees . . . Given the need for coverage and the obvious benefits of insuring against this risk, the fact only few Americans are buying long-term care insurance is often referred to as a puzzle,” OPM said.
Well, when putting together a puzzle, it helps to look at the big picture. It seems that some federal employees could benefit from doing that.