Unexpected Shocks Leave Retirees Without Adequate Income

Written By Mark Ohnsted

Last winter I was watching my nephew run across the carpet and his response to a static shock he received. There was of course pain and crying as a result of the static charge leaving his body. He immediately ran to his mother with the probable expectation that she would make the pain go away. As my sister tried to explain to a four year old the physics behind static electricity, I chuckled to myself not so much at the possibility that my sister may have thought she had a young Benjamin Franklin sitting on her lap, but that he would repeat this event for the remainder of his life – metaphorically speaking of course.

I have been a retirement plan actuary for nearly 30 years and in that role I have helped companies provide adequate retirement security for their employees. The traditional way to provide retirement security was through the guaranteed income of a pension plan and social security, the medical security of a retiree medical plan and wealth accumulation plans to provide security for unexpected risks. As adults we understand the lessons we learned as a four year old and try to prepare ourselves to lessen the pain and suffering of unexpected shocks.

Many retirees will receive a jolt from unexpected declines in wealth, illness, loss of spouse, serious disability and longevity and expect that the retirement assets available to them will provide needed security. However, that has all recently changed as many companies today only offer wealth accumulation plans designed using replacement ratio analysis to provide adequate retirement income -- leaving retirees exposed to unexpected shocks.

A recent study by the Society of Actuaries, Measures of Retirement Benefit Adequacy; Which, Why, for Whom, and How Much? suggests that replacement ratio analysis does not anticipate unexpected shocks during retirement and when they occur, the retiree faces a strong likelihood of running out of money. According to the study, if an employee were to save enough money to handle these unexpected shocks during retirement, their retirement nest egg would need to double or more in size. This is alarming, and if true would indicate that many retirees who thought they retired with sufficient retirement savings may be in for an unpleasant and shocking surprise.

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