Retirement Crisis Checklist
Retirees sometimes believe, mistakenly, that lifetime income providers unfairly profit from early deaths. To combat this perceived unfairness, one could educate retirees about mortality credits and explain that, in fact, any early deaths subsidize the individuals who live longer, says Prof. Suzanne Shu of UCLA.
Health care costs do not freeze when a person retires. In fact, medical services for the elderly that cost just one dollar in 1983 now have a price tag of more than four dollars, according to Prof. Eldar Shafir of Princeton University.
Retirees should annuitize their wealth. But from 1999 to 2005, only 2% to 6% of retirees elected guaranteed lifetime income when it was available in their 401(k)plans. But forced to actively make a choice making between guaranteed lifetime income and a lump sum, 49% of retirees actually picked the lifetime income option, according to Dr. Alessandro Previtero of UCLA.
Making a choice based only on the initial monthly payoutsthe most prominently featured product attributecan have serious consequences for the surviving spouse, notes Prof. John Payne of Duke University. Some guaranteed lifetime income products stop payouts after the purchasers death while others continue making payments.
More than 70% of individuals earning less than $20,000 per year stick with a default 401(k) plan offered by their employer. That compares to to less than one third of those earning between $70,000 and $79,000, according to Prof. Brigitte Madrian of Harvard University.
The pay-the-rent account can be invested conservativelyfor example, in products with guaranteed lifetime incomeso there is no risk of running out of money to pay the rent and other essential expenses. The discretionary spoil-the-grandkids account can be invested more aggressively to generate growth, says Prof. George Loewenstein of Carnegie Mellon University.
After age 60, the prevalence of dementia roughly doubles every five years. By the time people reach their 80s, more than half will suffer from either dementia or other significant cognitive deficits, says Prof. David Laibson of Harvard University.
The possibility of losing $50 is roughly equivalent to the potential of winning more than $100, according to Prof. Eric Johnson of Columbia University. But for retirees, early half of the retirees would refuse a gamble with a 50% chance of winning $100 and a 50% chance of losing $10.
Half of the participants in a virtual reality experiment were shown digital images that reflected their current selves in a "mirror." The other half saw what they would look like when they were older. Participants who saw their older, future selves allocated over two times more money to retirement than those who saw their current images, says Prof. Daniel G. Goldstein of Yahoo Research and London Business School
Give individuals a choice of an investment producing a return of $650 a month for life versus a product (aka, annuity) that generates $650 in monthly income and Prof. Jeffrey Brown of the University of Illinois found that only 21% chose the investment.
Americans held $15.6 trillion in retirement assets at the end of the third quarter of 2009, according to the ICI, but as we emerge from the Great Recession, advisors and investors want to know what they need to do to retain and grow assets from here. UCLA's Shlomo Benartzi provided some insights.