Mono 2008 m Rs08 01 Rappaport Signals (1)
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Signals,RetirementOptions,PhasedRetirementandRetirementDecisions
AnnaM.Rappaport,FSA,MAAA
AnnaRappaportConsulting
Presentedatthe2008Retirement20/20ConferenceDefiningtheCharacteristicsofthe21stCenturyRetirementSystem
CrystalGatewayMarriot,Washington,DCNovember1718,2008
Copyright2009bytheSocietyofActuaries.AllrightsreservedbytheSocietyofActuaries.Permissionisgrantedtomakebriefexcerptsforapublishedreview.Permissionisalsograntedtomakelimitednumbersofcopiesofitemsinthismonographforpersonal,internal,classroomorotherinstructionaluse,onconditionthattheforegoingcopyrightnoticeisusedsoastogivereasonablenoticeoftheSocietyscopyright.ThisconsentforfreelimitedcopyingwithoutpriorconsentoftheSocietydoesnotextendtomakingcopiesforgeneraldistribution,foradvertisingorpromotionalpurposes,forinclusioninnewcollectiveworksorforresale.
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AbstractSuccessinretirementdependsonbuildingenoughresources,notretiringuntilwehaveenoughandmanagingassetswellafterretirement.Thispaperfocusesonwhenandhowweretire.Howandwhentoretireisacomplexdecisioninfluencedbydifferentkindsofsignals.Thispaperfocusesonnewknowledgeaboutsignalsandhowtheyinteractwithretirementdecisions.Thepaperdemonstrateshowtheageatretirementinfluencesretirementsecurity.Theprimaryfocusofthepaperishowindividualsdealwiththesystemtoday,andsystemimprovementisasecondaryfocus.SocietyofActuaries(SOA)andotherresearchisusedtosupportthediscussion.IntroductionManyyearsago,whenIwasworkingtoearnanMBAfromtheUniversityofChicago,Itooklaboreconomicsfromaverywellknownlaboreconomist.AtthetimeIhadsubstantialexperienceworkingasanactuaryincludingseveralyearsofpensionconsulting.Theprofessortriedtoteachme(andtherestoftheclass)thatindividualstakejobsearlyinlifebycalculatingthevalueoftheirfuturewagesandbenefitsincludingpensionsandmaximizingthispresentvalue.WehadrepeateddisagreementsonthistopicasIindicatedthatvirtuallynoonecoulddothis,andthatbenefitsmanagersatourclientscouldnotdoiteither.Weleftattheendofthetermwithouteitheroneofuschangingperspectivesabouthoweconomicanalysisaffectshumanbehavior.Duringthatperiod,retirementhadbecomeawellestablishedpartoftheAmericandream,andmiddleclassAmericansgenerallylookedforwardtoaretirementofleisure.RetirementsecurityforAmericanswasgenerallyassumedandnotasubjectinthenewsverymuch.Thatwasmorethan20yearsago,andinthelastdecade,alothaschanged.Retirementisinthenewsalot,andthereisagreatdealofconcernaboutinsecurityinretirement.Whilemanypeoplewillhaveasecureretirement,manyotherAmericanswillnot;andbeingmiddleclassduringworkingyearsdoesnotensureretirementsecurity.Inpartthisisduetothewayindividualsrespondtoprogramsthatrequireindividualresponsibilityandpersonalsavings.ManyAmericansdonotdowellwiththedecisionsthatareneeded.Thereareemerginginsightsaboutthatresponseasadifferentacademicdisciplinehasbeenappliedtounderstandinghumanbehavioranddecisions.Thisdisciplineofbehavioralfinancefocusesonhowpeoplebehave.RichardH.ThalerandCassR.Sunstein,
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inNudgeImprovingDecisionsaboutHealth,WealthandHappiness,1provideaverydifferentanalysisofhowindividualsmakedecisions.TheydifferentiatebetweenHumansandEcons.Theyintroducedmetotheformalideaofchoicearchitecture.Inmylaboreconomicsclass,welearnedthatallhumanscanbeexpectedtoactlikeEcons.InNudge,welearnedthatitisnowacceptedthatHumansmakedecisionsinverydifferentways.Behavioralfinancetellsusthat:
Inertiaisaveryimportantfactor,anddefaultoptionsaremuchmorelikelytobechosenthanotheroptions.Defaultsaremorelikelytobechosenwhetherthedecisionistrivialorveryimportant.
Nudgescanbeveryimportantindrivinghumanbehavior. Framingmattersthedesignoftherangeofoptionswillpushpeoplein
differentdirections. Wheretherearetwooptionsandcombinationsareallowed,50percent
50percentisalikelychoice. Wheretherearemanychoices,peopledonotchoosewell.Toomany
choicesarebewilderingtothechooser,andoftenitisdifficulttounderstandtheimplicationsofthealternatives.
Decisionframingandchoicearchitectureinfluencemanydifferenttypesofdecisions.
WehavelearnedfromtheSOAresearchonpostretirementneedsandrisksthatmanypeoplehavemisperceptionsandmisunderstandingsaboutretirementrisk,andthattheytendtothinkshortterm.2Publicconfidenceaboutpersonalretirementsecurityexceedstherealityoftheassetsbeingaccumulatedformany.Wehavelearnedfrombehavioralfinancethatweneedtoconsiderchoicearchitectureandhowwedefineourchoices.Ihavetriedtosynthesizetheideasfromlaboreconomics,behavioralfinance,theSOAandotherresearchonhowpeopleperceiveretirementandwhattheydo.Myconclusionsare:
ThewordretirementisaNudgeorsignal.InmyviewaNudgeisasignalwithapushattachedtoit.
Thewordsearlyretirementgivepeoplepermissiontomoveawayfromworktheydontlike,withoutrequiringthemtodoadetailedanalysisoftheirresourcesandneeds.
1 Yale University Press, 2008 2 Society of Actuaries, Public Misperceptions about Retirement Security, 2004 and Public Misperceptions about Retirement Security, Closing the Gaps, 2007 and Spending and Investing in Retirement: Is There a Strategy? 2006.
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IfwestartanillustrationanddiscussionaboutSocialSecuritybenefitswiththeageofthelargestmonthlybenefitratherthantheearliestbenefit,wewouldprobablygetdifferentdecisionsabouttheageofretirement.
Planningforretirement,particularlyforthelateryearsandlongerterm,isacomplextaskandveryhardformostpeople.
Itisnotuncommonforpeopletomakedecisionsthatwillaffectthemfor25or30yearsormore,eventhoughtheiranalysisdoesnotfocusonmorethanthenextfiveyears.
ThefactthatpensionplanssetretirementagesataparticularageandthatSocialSecuritydoesnotincreaseretirementagesbeyond67,andhasnotchangedthatprovisionforover20years,createsafixedretirementagemindsetratherthananexpectationthatretirementageswillincreasewithlifespans.
Thesignalsaboutretirementfocusmoreonleisureandincomethanontheneedforincomeandlifetimesecurity.
Thesignalsaboutretirementfocusmoreondreamsthanrisksandriskmanagement.
GoalsandContextforthePaperMypurposeistothinkaboutsuccessfulretirementforindividualsandforsocietyasawhole.Successinretirementdependson:
Buildingenoughresources. Notretiringuntilwehaveenoughsinceworkisoftenpartofretirement,
thewhenisreallywhenandhow. Managingassetswellafterretirement.
Thispaperfocusesonwhenandhowweretire,acomplexsetofdecisionsinfluencedbydifferentkindsofsignals.Newknowledgeaboutsignalsandhowtheyinteractwithretirementdecisionsisexamined.Thepaperdemonstrateshowtheageatretirementinfluencesretirementsecurity.Theprimaryfocusofthepaperishowindividualsdealwiththesystemtoday,andsystemimprovementisasecondaryfocus.Thepaperisorganizedinseveralsections:
Thesignalsaboutretirement. Decisionsaboutretirement. Creatingabetterfuture.
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WhythisPaperIseeaworldinwhichlifespansareincreasinggradually,andtheretirementsystemischangingalot.Wecanthinkabouttheretirementsystemashavingbothspectacularsuccessesanddefiniteweaknesses.Fromanindividualpointofview,itcanbeseenasasuccessorfailuredependingoncircumstances.Thisworkisprovidedwithintheideathatwecanimprovethesystemandtheresultformanypeople.Mypersonalgoalsaresocietalandfocusonseveraldifferentoutcomes:
Moreindividualsthinkinglongtermanddoingbetterpersonalplanningforretirement,withmoreanalysisaspartofthatplanning.
Financialsystems,publicandprivate,tosupportretirementthatworkswithouttoomuchindividualdecisionmaking.Systemsthatsupportbetterworkoptions,laterretirementandretirementsecurityforasmanyAmericansaspossible.Systemsdesignedtorecognizethatmanyindividualswillnotdogoodlongtermplanning.
BetterworkoptionsforthirdageAmericansastheymovetowardfullexitfromthelaborforce.
Laterretirementandfullexitfromthelaborforcethatgraduallyadjuststochanginglifespans,andhelpsmaketheideaofretirementmoreaffordableformorepeople.
Thispaperonretirementagesandoptionsispartofabroaderefforttolookatsignalsandhowtheyaffecttheretirementsystem.Understandingandmodifyingthesignalsaboutretirementageswillnotbringaboutchangedirectly,butitcanhelpustomeetthesegoalsbyhelpingtochangeexpectationsandNudgeustowardsomewhatdifferentsystems.Signalsareimportantinthinkingaboutthegoalsbecause:
Theycreateexpectationsaboutpersonalchoicesanddrivetheoptionsweconsider,andsometimesoverrideanalyticalplanning.
Theymotivateindividualsandemployerstoconsidercertaintypesofworkoptions,provideideasaboutwhatispossible,andtheycreateexpectationsaboutwhatagoodemployershoulddo.
Theyhaveencouragedusnottothinkaboutthegradualincreaseinlifespansaswemoveforward.
Theyinfluencethestructureoffinancialsystemsusedtosupportretirement.
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TheSignalsaboutRetirementWecanthinkaboutthesignalssurroundingretirementinseveraldifferentways:
Thewordsdescribingretirement. TheprovisionsoftheSocialSecuritysystemandcommonpensionplans. Theadvertisementsandliteraturethatareinthecommonpress. Rolemodels,peersandfamily. Whatisnotsaid.
WordsDescribingDifferentAspectsofRetirementTherearemanydifferentwaystodescriberetirementandretirementages.Howmanypeopleareconsideredtohavethestatusofretirementwillbedifferentifonemeasuresreceiptofbenefits,laborforceactivityorselfdefinition.Wecanthinkofretirementasreflectingoursourcesofincome,ourstateofmind,ouractivitypatternorsomecombinationofthese.Wecanthinkofretirementalsoasbeingthetransitionpointbetweenaccumulationofassetsversususeofthemtosupplementorreplaceincome.Thesearesomeofthedefinitionsfromthereportsonthe2007RisksandProcessofRetirementSurvey.Theyreflectcarefulcraftingandshowsomeoftheissuessurroundingthemeaningofretirementandretirementages:RetirementThisisgenerallydefinedasexitingfromonesjoboroccupation,typicallyatanageatwhichtheindividualhasnoexpectationsofreturningfulltimetothelaborforce.Forthepurposesofthe2007Survey,retirementisbasedonexitfromaprimaryoccupationortheselfdefinitionofrespondents.RetireeTraditionally,apersonwho,havingattainedacertainageoften,butnotnecessarily,normalretirementagehasleftthelaborforce,withnoexpectationofreturning.Today,manyretireesleavefulltimework,butcontinuewithsomework.Asretirementischanging,thereisnocleardefinitionofretirement,andselfdeclarationofstatusproducesvaryingdefinitionswhenbasedonlaborforceparticipationcriteria.Otherstendtoconsiderthemselvesretirediftheyarecollectingretirementbenefits.Forthepurposesofthe2007Survey,respondentswereconsideredretireesiftheyclassifiedthemselvesasretiredinanemploymentstatusquestionorwereemployed,butrespondedthattheyhadretiredfromaprimaryoccupation.
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FullRetirementAgeDefinedbySocialSecurityastheageatwhichmonthlyretirementbenefitsareavailableinfullwithoutreductionforearlyretirement.Forbirthcohortsthrough1937,thishasbeenestablishedat65.Forthosebornin1938,fullretirementageforSocialSecurityiscurrentlysetat65yearsandtwomonths,increasinganadditionaltwomonthsforeachsubsequentbirthyear,reachingage66forthosebornfrom1943through1954.Itincreasesagainbytwomonthsforeachsubsequentbirthyearafter1954,reachingage67forthosebornin1960andafter.NormalRetirementAgeFormosttraditionaldefinedbenefitpensionplans,thishasbeenestablishedas65,thesameageatwhichfullSocialSecuritybenefitswereavailableforbirthcohortsthrough1937.Seealso,FullRetirementAge.PhasedRetirementThereisnostandardagreedupondefinitionofphasedretirement.Itisusedtodescribesucharrangementsasworkingparttimebeforeretirementorretiringandthentakinganewjob,becomingselfemployedorworkingonalimitedbasisforaformeremployer.Viewedbroadly,itmayincludereducingonesworkschedulebeforeretirement,changingdutiesatnormalretirementage,workingparttimeinretirementorsomecombinationofapproachestograduallyphaseoutofthelaborforce.Thedefinitionofphasedretirementistypicallylimitedtosituationswhereapartialpensionpaymentisavailableortoasituationwheretheindividualisworkingforthesameemployerasbefore.Theauthordoesnottotallyagreewiththisdefinitionofphasedretirementandwouldincludesituationswheretheindividualisworkingforanewemployer,orphasingdownwithoutpartialpensionpayments.Thisdisagreementservestoillustratethattherearemanynuancesinthesedefinitionsandthereisnoconsensusamongexpertsaboutexactlywhattheymean.Notdefinedinthesurveyreportsisearlyretirement,atermusedinmanypensionplanstodefinebenefiteligibilitypriortonormalretirementage.Usuallythereisabenefitreductiontoreflectthelongerperiodofpayment,butthisisnottrueinallsituations.NotethatexceptfortheSocialSecuritydefinition,whichcalledforagradualincreaseinretirementages,agesaregenerallydefinedasafixedageandtheydonotbuildinanyexpectationthattheywillgraduallyincreaseaslifespansincrease.
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SignalsfromSocialSecurity,EmployersandEmployerPensionPlansSocialSecuritytellsusthatpeopleareexpectedtoretirebetween62and70.Age62istheearliestretirementageforSocialSecurity,andtherearenofurtherbenefitincreasesorreasonstodelayclaimingafterage70.Ifpeopleevaluatedthedifferencesinbenefitscarefully,theymightconcludethatSocialSecuritybenefitssendasignalthatthereisanadvantageinwaiting,butitappearsthatmanydonotdothis.Themonthlyworkerbenefitin2008foraworkerwithmaximumearningsinallyearsbasedonclaimingagein2008isasfollows:
Maximum2008SocialSecurityBenefitsforaWorkerInitiallyClaimingBenefitsin2008
Claimingage Monthlybenefit62 $168265 $203070 $2794
SocialSecurityalsotellsusthatworkisanacceptablepartofretirement.InthecalendaryearspriortofullSocialSecurityretirementage(about66nowandincreasingto67),itispossibletoworkwhilereceivingbenefitswithearningsofuptotheearningstest,$13,560in2008,withoutanyadjustmentinbenefits,andabovethatamountbenefitsarereduced$2forevery$1earned.Afterthefullbenefitage,SocialSecuritybenefitscanbeclaimedwithoutanyrequirementwithregardtofuturework.Thereisnoadjustmentinbenefitsforcontinuedwork.NotethattheleveloftheSocialSecuritymonthlybenefitisveryimportanttotheeconomicsecurityofretiredmiddleandlowerincomeAmericans.Forfouroutof10olderwomenwholivealone,theirSocialSecuritybenefitisvirtuallyallthattheyhave.Manypeoplefeelthatemployersexpectthemtoleaveastheyreachtheirearly60s.Provisionsofretirementplansaswellasbuyoutsreinforcethisexpectation.Arecentsurveytellsusthatiftheywantpeopletostaylonger,Employersmayjustneedtoask:Manyretireesreporttheywouldhavebeenopentoanapproachfromtheiremployeraskingthemtostaylongerwiththecompany.Sixtyonepercentsaytheywouldhaveviewedtheexperiencepositively.Just10percentindicatetheywouldhavereactednegativelytoanapproachaskingthemtodelaytheirretirement.3 3 EBRI 2008 Recent Retirees Survey, Washington, D.C. This study looked at what would have encouraged recent retirees in the aerospace industry to say longer.
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Employerdefinedbenefit(DB)planstellusthatweareexpectedtoretirebynormalretirementage.UnlikeSocialSecurity,employerDBplansaredesignedtosignalallornothingretirement,andtheygenerallydonotformallysupportphasedretirement.Mostphasedretirementcomeseitherbyworkingparttimebeforeretirementorreturningtoworkafterretirement,eitheratthesameemployeroranotheremployer.Earlyretirementagealsosignalsthatitistimetothinkaboutretirement.Thenormalformofpayment,lifeincomewithsurvivorbenefitsformarriedparticipants,signalsusaboutthinkingaboutthepensionplanasincomereplacement.Evenplanswithlumpsumsprovidethesesignalssincetheycommunicatebenefitsasincome.Employerdefinedcontribution(DC)planstellusmuchlessaboutwhenorwhetherweareexpectedtoretire.Manyofthempaybenefitsprimarily(andinsomecasesonly)asalumpsum.Theyprovideasignalaboutretirementsavingsandresources,butleavemuchmoreopenexpectationsaboutwhentoretireandabouthowtousefunds.Theymakeplanningfarmoreimportant.AdvertisementsandLiterature:TheNewRetirementCommonadvertisementsforfinancialservices,retirementhomes,vacationsandotherproductsarefullofsignalsandshowretirementasacontinuousvacation,fishingtriporgolfgame.Theyfocusonleisureandshowhappy,healthypeople.Theytendtocreatesignalsandimpressionsaboutleisure.Theyforgetthatvacationisabreakfromwhatwenormallydo,andthatwecannotbeonvacationallofthetime.Peoplewhoretiredreamingofapermanentvacationoftenfindtheyareunpreparedtodealwithanewsetofdailyrealities.Whatwasexcitingasabreakfromworkcaneasilybecomeboringifitisadailyactivity.Recently,expertsfocusedonsuccessfulplanningareincreasingthinkingaboutthreedimensionsofplanningfinancial,healthandactivities.Thefocusonactivitiesconsidersnotjustleisure,butwork,volunteerism,hobbies,familyandbuildingasatisfyinglifeinthethirdageandbeyond.Recently,therehasbeenalotoffocusontheliteratureonhowretirementischanging,andonworkasapartofretirement.Severalbooksprovideterminologyandfocusonthenewretirementdesignedtocreatesignalsaboutretirement.Theauthornotesthatmuchofthisworkfocusesontheearlyyearsofretirement.Someofthisliteratureignorestheneedforriskmanagementandplanningforlimitations
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Herearesomeexamples:DontRetire,Rewire!byJeriSedlarandRickMiners.Thecoverpromisesusfivestepstofulfillingworkthatfuelsyourpassion,suitsyourpersonalityorfillsyourpockets.PortfolioLife,byDavidCorbett.ThecoverpromisesusThenewpathtowork,purposeandpassionafter50.Encore,byMarcFreedman.Freedmandiscussesworkthatmattersinthesecondhalfoflife,andtellsstoriesofpeopleinencorecareers,whoworkbothformoneyandthepromiseofworkthatmatters.Otherbooksprovidealongertermandmorebalancedapproachlookingatchallengesandrisksaswellasnextsteps.ProjectRenewment,byBerniceBratterandHelenDennis.Thisworkoffersatrailblazingretirementmodelforthegenerationofwomenjustnowleavingtheworkforce.Thesewomenwerethepreboomersandbabyboomerswhopioneeredthenewterritoryofwomenintheworkplaceandworklifebalance.Theauthorsemphasizethepossibilityofpositivechange,enlightenmentandadventure.Theyalsodiscusschallengesandmoredifficulttodiscusstopicssuchascaregiving,lossofaspouseandwhattodowhenyounolongerhaveyouridentity.SmartWomenDontRetire,TheyBreakFree,byGailRentsch.Thisbookdescribeshowwomenarereinventingtheirlivesandcareersinthesecondhalfoflife.TheQuest,fromSteveVernon.ThismaterialisaretirementplanningprogramintheformofaDVD.ThereisadifferenttwistonthistopicinapaperfromtheAustralianInstituteofActuariestitledItstimetoabolishretirement(andhereshowyoudoit)byDarrenWickman.4ThispaperfocusesonthereplacementofretirementbyaLifetimeIncomesystemthatfocusesondisability,notretirement,andalsosupportscyclinginandoutofwork,trainingandleisure.Governmentfunds
4 Paper presented to the Institute of Actuaries of Australia Biennial Convention, September 2007.
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wouldnotbeusedforincomereplacementforpeoplewhoareabletoworkinthisapproach.Thetypicallifecyclepatternisevolving,butretirementcertainlyremainspartofthelifecycleintheUnitedStates,Canada,Europeandmanyothercountries.Anumberofpeoplehavesuggestedlookingforanewtermfortheevolvingpattern,andsomehavesuggestedreplacingthesystemwithaverydifferentone.Itistheauthorsopinionthatwewillneverreachagreementaboutterminologytoreplacethewordretirementandthatfurther,mostpeoplewontreallybeabletoworkafterage75,sothatwhilewemightretirelater,retirementisunlikelytogoaway.RoleModels,PeersandFamilyAsetofsignalsandexpectationsiscreatedbywhatothersdo.Weareparticularlyinfluencedbyfamily,peersandpubliclydefinedrolemodels.Anextremeexampleofthiswillservetoillustrate.DuringarecenttriptotheDominicanRepublic,atourguideexplainedhowthesuccessofSammySosa,amajorleagueU.S.baseballplayeroriginallyfromthatcountry,hadchangedtheaspirationsofmanyyoungpeople.Formanyofthem,Sosassuccesshadledthemtothinkbeyondtheworldaroundthemandtodreamaboutandreachforfargreatergoalsinlife.Theimpactofpeersondecisionswasafocusatthe2008RetirementResearchCentersConference.Oneofthepresenterssaidthatthisinfluencedhispersonalresearchagendawhenheaskedhismotherhowshedecidedaboutwhentoretire,andsherepliedthatshehadstartedoutbytalkingwithherfriends.Someoftheresearchpresentedwasstructuredtoexplorehowpeersinfluencedindividualsastheymakeretirementdecisions.ThepaperWhoDeterminesWhenYouRetire:PeerEffectsandRetirementfindsIndeed,ourmainfindingisthatindividualdecisionsaboutwhentoretirestronglycorrelatedwiththeretirementtimingdecisionsoftheirpeers,whowedefinedtoberetirementeligiblecoworkerswithinthesameemployer.Theauthorspointoutthatthisiseconomicallylogicalinsomesituationswherethecircumstancesarethesame,butillogicalinotherswherethecircumstancesarenotthesame.5Theysuggestfurtherresearchonpeereffectsandtheirupsidesanddownsides.
5 Chalmers, John M.R., University of Oregon, Johnson, Woodrow T. U.S. Securities and Exchange Commission, and Reuter, Jonathon, Boston College, Who Determines When You Retire? Peer Effects and Retirement, presented at the 2008 Center for Retirement Research Conference.
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Picturesofwhatwecandoandbeareimportantaswethinkaboutemergingpatternsofthirdageactivity.Thisisthefirsttimeinhistorythatsomanypeoplearelivingtohigherages,andthatpeoplearehealthyandactiveattheseages.Formanypeople,familypatternsbeforethemprovidenohelpinshapingtheirownthirdage.Weneedtofindmorerolemodelstohelpusthinkabouthowtobuildournewlives.Severalofthebooksreferencedaboveareaboutlookingatpersonalrolemodelsandindividualstories.Rolemodelsandexamplesareimportantforindividualsbutalsoforemployersastheythinkaboutphasedretirementandnewjoboptions.Employersseekoutcasestudies:AcasestudythatbridgestheorganizationalandindividualperspectivesisBonSecoursHealthSystem,whichusesthreedifferentapproachestophasedretirement.6
Employeesmayretireatage65butcontinueworkingparttime(notmorethan24hoursperweek)whilecollectingtheirfullpension.
Employeeswhoworkpastage70.5beginreceivingapensioncheckinAprilofthefollowingyear,regardlessofwhethertheycontinuetoworkforBonSecours.
Employeeswhoprefertoretirealtogethermaycomebacktoworkafteranabsenceofatleastthreemonths.Theycontinuetoreceiveretirementbenefitsaftertheyarerehired,regardlessofhowmuchtheywork.
Employeeswhochooseanyoftheoptionscontinuetoearnpensioncreditiftheyworkover1,000hoursinayear.Theirbenefitisthenrecalculatedwhentheystopworking.DawnMalonefromBonSecoursHealthSystemdescribedsomecasestudiesofemployeesandhowtheyhadmovedfromjobtojob.Hereisoneexample:
Inthisnextscenario,welllookatNettiescareer.Shebegannursingin1957.Sheworkedonthreeunits.Shewasoneofthefirstworkingmotherstorequestflexschedulingtoaccommodatechildcareissues.Herhusbandwasinthemilitaryandwasgoneformonthsatatime.Shewasoriginallyhiredtowork3p.m.to11p.m.However,withsmallchildrenathomeandchildcareissues
6 Rappaport, Anna and Young, Mary, Phased Retirement After the Pension Protection Act, The Conference Board, New York, 2007.
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interferingwithherworkschedule,NettielobbiedtheNursingDirectortoallowhertoflexherschedule.Sheworked7a.m.to7p.m.formanyyears.In1975,shetransferredtoEmployeeHealth.Duringthistime,shealsoworkedPRNevenings,andweekendsontheunits.Thismadeherthefirstemployeeallowedtoworkinmorethanonecostcenteranotherflexschedulingmilestone.In1999,sheretired.TheninJanuary2000,shereturnedtoworkforEmployeeWellness.Amongotherduties,sheperformsTBskintestsonemployees.Shehasgraduallyreducedherhourssinceretirement.Shecurrentlyworkstwodaysperweek.7
Thisandseveralotherexamplesmadephasedretirementmuchmoreunderstandableanddemonstratedhowindividualsusearangeofoptionstoapplyskillsindifferentroles.HiddenSignalsThingsThatAreNotSaidSincethereisalotofinformationprovidedaboutretirementinmanydifferentways,therearealsohiddensignalsthatwecanfindinwhatisnotsaid.ThebiggapsinthemessagesthatIhearmostoftenarethefailuretostresstheimportanceofmakingmoneylastalifetime,theuncertaintyoflifespan,thefactthatsomepeoplewilllivetoage100andtheneedtothinkaboutriskprotection.Thereisquitealotoffocusonhowmuchonecansafelywithdrawfrominvestments,butmuchlessonthechancethatinvestmentswilldeclineinvalueandthattheywillrunout,orbeusedupforlongtermcareexpenses,leavingthecoupleor,moreoften,thewidow,withnothingbutSocialSecurityorSocialSecurityandahouse.Thegapsareaggravatedbecausethereisquitealotofnegativepublicityaboutannuities,muchofitreferringtodeferredvariableannuitiesasaninvestment.However,thedistinctionbetweenimmediateanddeferredannuitiesisoftenmissing,asisthedistinctionbetweenbuyingindividualannuitiesandselectingincomeoptionsinemployersponsoredplans.
7 Several examples are published in Pension Section News, the Society of Actuaries, January 2008, Some Interesting Information About Phased Retirement, by Anna M. Rappaport. Stories based on comments made during Webcast sponsored by The Conference Board in June 2007.
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DecisionsaboutRetirementSomeoftheMostImportantDecisionsWeWillEverMakeThedecisionsaboutwhentoretireandhowtoorganizethedistributionofourretirementassetsareamongthemostimportantlifedecisionswewillevermake.Arelatedsetofdecisionsincludeswhetherwewillcontinuetoworkonsomebasisaspartoftheretirementperiod.Newinsightsreinforcehowimportantsignalsaretovitaldecisions.Wearestilllearningaboutthebalancebetweeninertia,intuition,signals,economicanalysisandriskpreferencesindecisionmaking.SOAResearch,SpendingandInvestinginRetirementconcludedItcanbearguedthatthedecisionofwhetherandwhentoretireisoneofthemostimportantfinancialdecisionsapersonmakes.Itcaneasilyimpactapersonsfinancialsecurityforaperiodof25yearsormore.Butrelativelyfewfocusgroupparticipantsretiredwiththebenefitofhavingundertakenacarefulanalysistodeterminewhethertheirfundswouldsustainthemthroughouttheretirementperiod.Andnonereportedthattheyretiredafterachievingacalculated(dollar)targetlevelindicatingthattheycouldaffordtoretire.8Thesefocusgroupswithretireeshelpusunderstandmoreaboutthedecisionspeoplemakeattimeofretirement.9
Ithoughtyouweresupposedtoretirewhenyouwere65andIthoughtIwouldtryit.Ididntconsiderhowlongretirementwouldbe.
TheseriesofSOAsurveysonPostRetirementRiskregularlyhasshown,ashasotherwork,thatpeopleexpecttoworktoolderagesthantheretirementagesofcurrentretirees.Twentyeightpercentofthepreretireesinthecurrentsurveyindicatethatretirementdoesnotapplytothem,andtheydonotseemtoexpecttoretire.10Manypeopletellmethattheywillnotretire,andthenwhenIaskthemiftheyplantoworkbeyondage75,theyusuallysayno.Myimpressionis
8 LIMRA and the Society of Actuaries, Spending and Investing in Retirement: Is There a Strategy? 2006, page 6. 9 Quotations from Spending and Investing in Retirement, LIMRA and Society of Actuaries, 2006. Focus groups of individuals from 2 to 10 years after retirement designed to understand decisions made about when to retire, its affordability and how money was invested in retirement. Participants had significant assets in 401(k) or similar plans. 10 2007 Survey of Risks and the Process of the Retirement, Society of Actuaries
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thatwhenpeoplesaytheydonotplantoretire,thatmeanstheyplantoretirelater.Someofthethingsthatweknowaboutthisdecisionare:
PeoplewithonlyDCplansretirelaterthanthosewhohaveDBplans. ThemajorityofpeopleclaimSocialSecuritybenefitsattheearliest
possibleage.Thosewholivetohigheragescertainlyoverage90wouldhavebeenbetterofftowaitaslongaspossibletoclaimbenefits.
Inrecentyears,commonadviceprovidedbymanyfinancialplannersandemployeesofSocialSecuritywastoclaimbenefitsasearlyaspossible.
Themajorityofrespondents(54%)inarecentsurveyintheaerospaceindustryconsideredtheirretirementtimingfor18monthsorlessbeforetheyretired,and72%consideredthetimingfor2yearsorless.11
Mostoftheretireesinthestudyoftheaerospaceindustrydidnothaveagooddiscussionaboutplanswiththeiremployersbeforetheyretired,andtheywouldhavebeenwillingtostaylongerifaskedandifmadetofeelthattheywerevalued.
Fouroutof10olderwomenwholivealone,themajorityofwhomarewidows,havevirtuallynoincomeotherthanSocialSecurity.
Itisnotuncommonforpeopletoretirewithoutdoingalongertermfinancialanalysis.
However,notallindividualschoosewhentheywillretire.Historicallyaboutfouroutof10peopleretiredearlierthantheychoseto,and,in2008,thishadincreasedtofiveoutof10.12Manyoftheparticipantsinthefocusgroupsdiscussedabovealsodidnotchoosewhentheywouldretirefromtheirlongtermjobs.TheTimingofRetirementandWhyitisImportantWhenonedecidestoretireisextremelyimportantinretirementsecurity.Thereareseveralreasonsforthis:
Medicarestartsatage65,andemployercoverageoftenisnotcontinuedtoretireesbeforeage65.Forpeopleinpoorhealth,itisextremelydifficulttogetindividualhealthcoverageandveryexpensiveifitisavailableatall.
SocialSecuritybenefitsincreasewithclaimingage.Themonthlybenefitatage70willbeabout75%largerthanthebenefitatage62.Whilethe
11 EBRI Issue Brief No. 319, EBRI Recent Retirees Survey: Report of Findings, July 2008, page 4. 12 EBRI Retirement Confidence Study series.
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shorterperiodofpayoutoffsetsthehigherbenefit,thepresentvaluemaystillincrease,particularlywhenwidowsbenefitsareconsidered.
Forfouroutof10widowsoverage65,SocialSecurityisessentiallytheonlyincomethattheyhave.
Whenonestartstousesavingsatalaterage,thereisashorterperiodduringwhichtheyneedtobeused.Itbecomesmuchmorecosteffectivetobuyanannuityatahigherageaswell.
Whenonestartstousesavingsatalaterage,youhavemoreyearstosaveandmoreyearstoearninvestmentincome.
Addedyearsofworkusuallymeanmoreyearsofemployerprovidedhealthinsurancecoverage,whichisparticularlyimportantforpeoplewhoarenotyetMedicareeligible.
Addedyearsofworkforindividualswhoarecoveredbypensionplansusuallymeanmoreyearsofpensioncredit.Iftraditionalpensionbenefitsarepaidbeforenormalretirementage,themonthlybenefitsareoftenadjustedtoreflectthefactthatbenefitswillbepaidformoreyears.
ResearchonFinancialImpactofDelayingRetirementThesefactorsallinteract.Hereisanexampleconsideringseveralofthefactorstogether.ACongressionalBudgetOffice(CBO)Study,RetirementAgeandtheNeedforSaving,May2004,illustratestheimpactofchoosingretirementatages62,66and70forsinglepersonsandmarriedcouples.Theage62coupleneeds8to11timesannualincomeinassetsinadditiontoSocialSecurityiftheyaretoretireandreplace80percentofincome.Atage70,theamountneededisto2timesincome.MuchofthedifferencestemsfromhigherSocialSecuritybenefits,immediateaccesstoMedicare,feweryearsofretirement,andmoretimetosave.Thisreinforcesthebenefitofconsideringbothtimingandneedsforplanningpurposes.TheCBOstudyemphasizesthefactthatthegapbetweenwhatisprovidedbySocialSecurityandwhatisneededforareasonablelevelofretirementincomeisverylargeatage62,anditgraduallydecreasesovertimeasSocialSecuritybenefitsprovidemoreofwhatisneeded.Thisissueisbeingrecognizedinvariouscircles.AliciaMunnellandStevenA.Sasstellus:Americanswillneedtoworktwotofouryearslongerthantheydoatpresenttoensureareasonablycomfortableoldage.Astheaverageretirement
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ageformenhasbeen63forthepastquartercentury,theymustnowremainemployeduntiltheirmidtolate60s.13ResearchonPublicKnowledgeaboutDelayingRetirementTheSocietyofActuaries2007RisksandProcessofRetirementSurveyexploredwhatthepublicknowsabouttheimplicationsofdelayingretirement.InresponsetothequestionSupposeyouhadretired/youweretoretirethreeyearslaterthanyouactuallydid/arecurrentlyplanning.Doyouthinkthiswouldmakeyourretirementfinancially.?
Retirees PreretireesAlotmoresecure 15% 14%Alittlemoresecure 30% 54%Nomoresecure 51% 30%Dontknow 4% 3%
Thesurveywentontoaskrespondentshowvariouselementsofchangewouldmakethemmoresecureiftheyretiredthreeyearslater.Resultsareasshowninthefollowingexhibit.
32%59%
15%28%
15%17%
12%17%
11%16%
58%
48%61%
48%54%
40%52%
41%54%
28%14%
47%
16%17%
A lot A little
How much, if at all, would each of the following have increased your financial security in retirement [if you retired three years later]? (Among those providing retirement age from primary occupation; Retirees, n=385; Pre-retirees, n=266)
Source: Society of Actuaries, 2007 Risks and Process of Retirement Survey
(48%)(77%)
(63%)(78%)
(70%)(51%)
(63%)(83%)
Having 3 more years to make contributions to investments
Continuing to receive health insurance from your employer
Relying on your savings for a shorter period of time
Increasing the amount you receive from a traditional pension plan (retirees n=242; pre-retirees n=207)
Increasing the amount you receive from Social Security
Increasing the amount your [surviving] spouse will receive from Social Security (if married)
RetireesPre-retirees
RetireesPre-retirees
RetireesPre-retirees
RetireesPre-retirees
RetireesPre-retirees
RetireesPre-retirees
(63%)(86%)
(52%)(70%)
13Munnell, Alicia H. and Sass, Steven A., Working Longer: The Solution to the Retirement Income Challenge, , Brookings, 2008, page 117.
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Theresponsesindicatedthatthebiggestexpectedimpactamongpreretireesiscontinuingtoreceivehealthinsurancefromyouremployer,with59percentsayingitwouldincreasesecurityalotand17percentalittle.Theotherresponsesthatgotthemostattentionwerehavingthreemoreyearstomakecontributionstoinvestments,with28percentofpreretireessayingitwouldincreasetheirsecurityalotand58percentalittle;andincreasingtheamountyouwillreceivefromatraditionalpensionplan,with28percentsayingitwillincreaseitalot,and54percentsayingitwillincreaseitalittle.Preretireesfocusedontheimportanceofmaintainingemployerhealthinsurance,buttheydidnotplacealotofimportanceordifferentiateverymuchbetweentheimpactofneedingretirementassetsforashortertimeandgettingmoreSocialSecurityorpensionsatalaterage.Thefocusonhealthcarecoverageisveryrealisticsinceitisverydifficult,expensiveandsometimesimpossibletobuycoverageasanindividualontheopenmarket.Otherresearchhasrepeatedlyshownthataccesstohealthinsuranceisaveryimportantfactorinmanyindividualsdecisionsaboutwhentheywillretireandwhethertoseeknewwork.Theresponseswithregardtowaitingandotherfactorsarenotsurprisingwhenconsideredwithotherthingsthatweknowaboutpublicknowledgeincludingthelackoflongertermplanning,andthefailureofmanypeopletodoacarefulanalysisofthesituation.However,formostpeople(allbutthosewithmajorhealthexpenses),theeconomicimpactofnotneedingtouseretirementresourcesforthreemoreyearswillbemuchgreaterthanthevalueofthreemoreyearsofemployersponsoredhealthinsurance.Iftherespondentshaddoneacarefulanalysisoftheimpactofthealternativefactors,wewouldexpectdifferentresponsestothesurvey.PreretireestendtounderestimatetheimportanceofSocialSecurity,andthesamethingshowsuphere.TheauthornotesthatthereisnoparticularfocushereonthesurvivingspousebenefitfromSocialSecurityeventhoughfouroutof10widowshavevirtuallynothingotherthanSocialSecurity.Anotherquestioninthesurveyfocusedontheawarenessoffinancialchangeonlossofaspouse.Theresultsindicatedrelativelylowawarenessofthelikelydeclineineconomicstatusonwidowhood.
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WorkPlansandtheDecisionMakingProcessResearchhasrepeatedlyshownthatmanymorepeople(oftensevenoutof10)saytheyplantoworkinretirementthanactuallyworkinretirement.Therefore,workexpectationsarelikelytobeovervaluedinthedecisionmakingprocess.RetirementTimingandExpectationsResearchalsoshowsthatpeopleareretiringearlierthantheyexpectto.The2007RisksandProcessofRetirementSurveyshowedthatonceagainpreretireesexpecttoworklongerthanretireesactuallydid,withtheresultsillustratingdramaticdifferencesbetweenthetwogroupsforcertainresponses.Halfofretireesretiredbeforeage60(52percent),whileonlyonein10preretireescurrentlyintheworkforceexpectstoretirepriortoage60(10percent).Thelargestshareofpreretireesintheworkforcereporttheyplantoretireatorafterage65(36percent),comparedto17percentoftheretireeswhoretiredat65orolder.Amongthoseintheworkforce,nearlythreein10preretireessayretirementdoesnotapplytotheminotherwords,theyexpecttoneverretire(28percent).Theseresultsshowthatsomepreretireeshaveexpectationsaboutworkthatwillnotberealized.Somewillbeforcedtoretireearlierthantheyexpectduetopoorhealth,layoffsorcaregivingresponsibilities.HistoricalfindingsfromtheRetirementConfidenceSurveyillustratethatfourtofivein10workersretirebeforetheyhadexpected,whileresultsfroma2006LIMRAInternationalsurveyindicatethatsixin10retireeshadretiredearlierthanplanned.14
ChangingtheSignals:DirectionsforaBetterFutureSowhatmightwedotochangesignalsinawaythatwillsupportourgoals?
IndexSocialSecurityandprivateplanretirementagesoratleastincreasethemretirementagesthatchangegraduallywithchangesinlifespanswouldcreateverydifferentexpectations.NotethattheAmericanAcademyofActuariesissuedastatementonAug.4,2008callingforanincreaseinSocialSecurityretirementages.
14 Society of Actuaries, Key Findings and Issues: The Phases of Retirement and Planning for the Unexpected, 2007 Risks and Process of Retirement Survey.
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ShowinformationaboutSocialSecuritybenefitsbystartingwiththeagewherethemonthlybenefitisthelargestratherthantheearliestageatretirement.
DiscussretirementasatimewhenwagesandearningsarereplacedbySocialSecurity,pensionsifanyandtheuseofretirementassetsfocusthoughtaboutretirementintermsofsourcesoffinancialsupport.
Trytobuildacultureofanalysisandimprovefinancialliteracyencourageindividualstodomoreanalyticalworkinretirementplanning.Createsituationswherepeerstalkaboutthisandwherepeergroupsencourageit.Manytoolsarealreadyavailable,andmorearecomingonthemarketregularly.
Balancemessagesaboutleisure,workinginretirement,newretirementwithmessagesaboutrisk,longlifeandtheneedforretirementincome.
Buildandformalizenewandcreativeworkoptionsforthethirdagewhilemanypeopleworkinthethirdageandmanyfindnewwaystowork,therearerelativelyfewformalemployerprogramsforphasedretirementorformalprogramsforcreativeworkoptions.
RemoveandreducebarrierstophasedretirementintheUnitedStates,therearearangeofbarrierstophasedretirement.Theyincludecomplexitiesinpensionlawsanduncertaintiesaboutandbarrierstotherehireofretirees.Thesebarriersshouldbeaddressedsothatphasedretirementcanbecomeanacceptedoption.
Changetheterminologyaboutretirementageswhileitdoesnotseempracticaltogetanentirelynewterm,itissuggestedthatthetermsnormalandearlyretirementarenothelpfulinworkingtowardadifferentworld.
Buildexpectationsaboutemergingpatternsofretirementandworkinthethirdagebuildinformationandcasestudiesaboutwhatbothemployersandindividualsaredoing.
Improvecommunicationsbetweenemployersandpotentialretireessothatbothareawareofsituationswhereitwouldbehelpfulforpeopletoretirelater.
Recognizethelimitationssurroundingfinancialliteracyandincludeappropriatedefaultsinprograms.
PostscriptAlthoughthispaperdealsprimarilywiththeperiodaroundretirementage,thechoicesandresourcesavailableatthattimeareveryinfluencedbywhatwas
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donetosaveandbuildresourcesfromentryintothelaborforcetotimeofretirement.Theimportanceofsavingandplanningearlyareveryimportantandshouldnotbeforgotten.Themorethatisdoneearly,thebettertheoptionswillbethatareavailableaswereachretirementage.