Risks Associated With the Spend-down of Retirement Funds

Presentation from Group 3

Introduction

What is RISK?Risk is the potential that a

chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). 

 Potential losses themselves may also be called "risks".

 Almost any human endeavour carries some risk, but some are much more risky than others.

Risks in RetirementRetirement spend-down? Retirement planning?

There are many things that could go wrong even with a carefully planned retirement. . A recent Society of Actuaries survey of 804 people ages 45-80 identified greatest retirement concerns

What could go right?

Ample savings + wise investments + favorable conditions = Happy Retirement!

What could go wrong?

These common retirement worries may become YOUR reality:

LongevityInflationStock market slumpsHealth expenses/ Long term care costs

Longevity Impact

Failing to plan for a longer than average lifetime can lead to an underfunded retirement

More than 6 in 10 underestimate their life expectancy

     -67% of retirees and 61% of pre-retirees underestimate

     -50% of people will live longer than the average life expectancy

Social security timingMonthly benefit increases 75% if a person waits

until age 70 to begin receiving benefitsIndividuals have to decide what time frame works

best for them

Decrease in income from spouse passing awayPension reductionSocial security reduction

Inflation Impact

Why is Inflation bad?It can cause your money to have less value.Need to withdraw more principal than

expectedThe retiree wants low inflation and doesn't

want high inflation

What is the most likely scenario:The market expects to see about 2% inflation for

the next ten yearsHistorically, inflation has been around 3%

How should a retiree respond?

Stock Market

InvestmentBondsCDStocks

 Best case scenario Vs. Worst case scenario

In conclusion, higher the return rate (investing in stocks, especially in small-cap market), the more risk involves. And vise versa. It is really hard to predict what most likely happen to one’s retirement plan when one retires, because it really depends on how one diversifies the portfolio. Moreover, the stock market can fluctuate dramatically. Letting the expert handle your plan will be the best solution, since they know better.

Healthcare

Healthcare Cost Exceed Healthcare Savings

Rising healthcare costs Disability Insurance costs Nursing home costs

Assisted Living costs Hospital Stays, Prescription costs

Best Case:

Pay for higher healthcare premiumsNo chronic health conditionsMORE..

Worst case:

Pay for higher healthcare premiumsMany chronic health conditionMORE..

Most likely case:

Pay for higher healthcare premiums

One chronic health condition (80%)

No disability (19.7% disability among the elderly, and it’s decreasing)

Few visits to the hospital, a few prescriptions

Conclusion

To Recap, the Four Main Risks to Spending-down Retirement Funds:

·         Longevity·         Inflation·         Stock Market Slumps·         Health Expenses/Long-term Care

Expenses

And they all interact with one another

Thank you for your time!!

Group MembersIntroduction UjalaRizwanLongevity Impact Joseph StowellInflation Richard HerschStock Ki-Heul KimHealth Care Elizabeth CastilanoConclusion Zachery MountelPPT compilation Junkai Zhang