Calculating the security of one’s retirement may prove to be a fool’s errand, according to recent findings from the Society of Actuaries (SOA).
Although early planning is usually considered a proactive step in protecting one’s savings, unpredictable “shocks” render such preparations useless in SOA’s Measures of Retirement Benefit Adequacy: Which, Why, for Whom, and How Much?
“Shocks,” according to the report, can be defined as a number of unanticipated events, including major declines in financial assets; illness; disability; death of a spouse; even prolonged aging.
Because everyone’s experiences differ, so does measuring the adequacy of retirement benefits per individual.
“The best strategies to preserve assets without shocks may not be the best strategies once shock events are considered,” writes SOA. “Making retirement decisions based on averages increases the risk of running out of money.”
The level of retirement wealth necessary to be even 95% confident of having sufficient funds that meet all cash flow needs, SOA suggests, is much higher than what is needed “on average.”
With benefit adequacy being driven largely by these unpredictabilities and also variations in investment returns, future planning needs to continue even after retirement as situations change.
There are a number of retirement assets people can draw from to secure savings.
Annuities, long-term care insurance, Social Security, mutual funds and other financial assets, and even tapping one’s home equity through a reverse mortgage could provide sufficient retirement resources. SOA forewarns, however, that each of these comes with their own set of risks.
Written by Jason Oliva