Investing during Retirement

The Society of Actuaries has conducted research on how individuals invest their funds during retirement and the impact of economic change on that investment. Key findings of the surveys included the following:

• Preretirees are much more concerned about risk than retirees.
• There has been little change in the retiree perceptions about risk over the years.
• Preretirees became more concerned generally about risk between 2001 and 2003, not surprising in light of the September 11th events and the poor equity markets, but they have reduced their concern from 2003 to 2007.
• There was no similar significant shift in preretiree risk concerns from 2007 to 2009.
• Inflation and medical costs were the biggest risk concerns in the past. It is unclear what they will be in the future.
• Outliving assets is not a big concern.
• The conclusions reached in the survey results are consistent with many other information sources indicating misinformation about risk and low-risk awareness. It complements information gathered through the work of behavioral economics on how individuals make choices.

Retirement Phases

• An initial active period, which may include some work, and a variety of forms of other engagements such as travel and vigorous recreation
• A more limited period, where physical or mental limitations impose some restrictions on the individual
• A severely limited period, when a great deal of care and support are needed.
• It is clear that how income is expended and the amounts needed can vary greatly during these periods. Earnings to supplement retirement income are most likely in the first period described above. Extra spending to pursue lifelong dreams and other activities is also most likely in the first period, while, on the other hand, additional expenditures for health and personal care needs are most likely to occur in the last period. In addition, individuals choosing special housing that provides support for health needs will encounter significant extra expenses for such housing.

Benefit Payout Models

U.S. Social Security benefits are paid as a life annuity indexed for inflation.

Medicare benefits start at the age of 65, and they can be viewed as an indexed life benefit.

Role of taxes: Funds in qualified plans--employer-sponsored programs and individual retirement arrangements (IRAs)--accumulate tax-deferred. Employees contribute pretax dollars and investment income is also tax-deferred. A key part of distribution practice is to maintain tax-deferred status of funds as long as possible.

Roth IRA programs allow an alternative for tax-preferred retirement savings. Post-tax dollars are saved and investment income is tax-free.

Alliance for Retired Americans Meets in Las Vegas

The Alliance for Retired Americans recently held its national convention in Las Vegas. Keynote speaker was Secretary of Labor Hilda Solis.

Ontario Retirement Home Regulations

The province of Ontario, Canada, will soon be regulating retirement homes for the first time. New legislation will create a regulatory authority with the power to license and inspect retirement homes. The bill defines a retirement home as one where a minimum of six unrelated residents, primarily aged 65 and over, purchase accommodation and care.

Ontario will enforce new mandatory care and safety standards, new requirements for retirement homes to have emergency plans and inflection control programs, and police background checks for staff. Also in the offing will be a new set of rights for residents, including the right to know the true cost of care and the right to live in an environment with zero tolerance for abuse or neglect.

Unlike nursing homes, which receive government funding to provide medical care to elderly patients, Ontario retirement homes are privately operated and until now have not been regulated.

Balances and Retirement Income

An article “Balances and Retirement Income From Individual Accounts: U.S. Historical Simulations” recently appeared in Benefits Quarterly. The authors use historical returns and interest rates to model the effects of financial markets' volatility on the retirement security of workers. They demonstrate that, even over short periods of time, market volatility can produce significantly different defined contribution (DC) plan retirement outcomes for workers with otherwise identical contribution rates, salary and investment strategies. Their model also shows that by transferring some investment risk and opportunity to the plan sponsor, a cash balance defined benefit (DB) plan produces steadier but typically lower retirement outcomes than those derived from DC plans. The authors conclude that the mixed strategy of a DB plan with a market-sensitive DC plan is better than simple strategies using a single approach.

The End of an Audacious Career

Timothy A. Bassett has enjoyed a long tenure as head of the Essex Regional Retirement Board. During that time, he approved special pension deals for himself and a key political ally. As a result, he  has been fired from his $137,000-a-year position.

Bassett had been under scrutiny since the Boston Globe reported in 2009 that he and his wife used political connections to secure for themselves tens of thousands of dollars in enhanced annual pension benefits. All in all, according to an audit conducted by the Public Employee Retirement Administration Commission, Bassett had spent hundreds of thousands of dollars in public money without the Essex board's approval.

Expecting to Work Longer

According to a study by MetLife, workers age 55 to 70 expected to work until age 70. Those over 66 plan to work until age 76.

Retired Worker Benefit Applications

Nationwide, the number of retired worker benefit applications grew 21% for the fiscal year ending Sept. 30, 2009, according to the Social Security Administration.

Benefit Payments

The Organization for Economic Cooperation and Development (OECD) has released a paper on Forms of Benefit Payment at Retirement.  It notes three main options, or combinations thereof, for the payout phase in order to allocate assets accumulated in defined contribution plans.

1. Lump sum - A single payment
2. Programmed withdrawals - A series of fixed or variable payments whereby the retiree draws down a part of the retirement capital (and continued investment earnings thereon). Any amount remaining in the retiree's account at his or her subsequent death belongs to the estate and is paid to the retiree's family and other beneficiaries. If the retiree lives to an advanced age, there is a clear possibility (under some programmed withdrawal arrangements) of the payments becoming very small in the later years. Under other arrangements, there is the risk of the capital being completely exhausted before death. Annuities certain are a specific form of programmed withdrawals.
3. Life annuity - A stream of payments for as long as the retiree lives. There are also life annuities with additional guarantees, with continued payment to the surviving spouse, with escalation of the benefits in payment.

The default in current U.S. practice is the required minimum distribution.

When a lump sum is paid, the individual has the greatest choice of how to invest funds. Depending on the market, one can also choose to buy an annuity. Once an annuity is purchased, it is usually locked in. An annuity purchase is irrevocable, but, in contrast, programmed withdrawals may be changed at any time. It is also possible to shift from programmed withdrawals to annuity purchase at any time, or on a staggered basis.