Planning for retirement has always been hard, because retirees face numerous risks – including outliving their money (longevity risk), investment losses (market risk), unexpected health expenses (health risk), the unforeseen needs of family members (family risk), and even retirement benefit cuts (policy risk). The questions are: 1) How important are these risks? and 2) Do retirees properly perceive these risks when making their consumption and investment decisions?
Since 2018, First Eagle Investment (Trades, Portfolio)s has collaborated with the Boston College Center for Retirement Research (CRR) to develop actionable insights and tools for plan sponsors, consultants and financial professionals. Leveraging CRR’s decades of scholarly research and First Eagle’s many years of practical experience, together we are committed to serving as a steadfast resource in support of American workers’ journey toward secure retirement.
This content is part of a series of wide-ranging insights that explore key challenges that retirement savers face in the years leading up to and while in retirement. Additional topics address how different workers save in their company-sponsored retirement plans, what affects spending in retirement, and the impact of healthcare expenses for different segments of the retiree population.
Introduction
Planning for retirement has always been hard, because retirees face numerous risks – including outliving their money (longevity risk), investment losses (market risk), unexpected health expenses (health risk), the unforeseen needs of family members (family risk), and even retirement benefit cuts (policy risk). The questions are: 1) How important are these risks? and 2) Do retirees properly perceive these risks when making their consumption and investment decisions?
To answer these questions, this brief, which is based on an earlier paper, systematically values and ranks the impacts of these various risks from both the objective and subjective perspectives.1 That is, it quantifies the magnitude of the objective risks that retirees face, repeats the exercise for retirees’ subjective perceptions of the risks, and then compares the two. The analysis, which uses data from the Health and Retirement Study, involves constructing a lifecycle optimization model to quantify each risk by estimating how much wealth retirees are willing to give up to
insure against it.
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