44 INVESTMENT ADVISOR SEPTEMBER 2020 | ThinkAdvisor.comthe empirical evidence?
His analysis shows that the biggestrisk in the objective ranking is longevityrisk, because it affects the planning timehorizon for retirement life. Health riskfollows, mainly due to the unpredictability of medical expenditures in later life.
Market risk ranks third on the basis ofretirees’ relatively long investment horizon, which is about 20 years for averagelife expectancy. Family risk and policyrisk rank fourth and fifth, respectively;the latter because Social Security reformis unlikely to significantly affect peoplewho have already retired, Hou says.
For the subjective perspective, Hou
relied mainly on data from the Health
and Retirement Study, a biennial longitu-
dinal survey of some 20,000 Americans
over age 50. In this research, market
risk ranks highest — reflecting what You
calls retirees’ “exaggerated assessments
of market volatility.”
Perceived longevity risk and health
risk, in second and third places, rank
lower because retirees are pessimistic
about their survival probabilities and
often underestimate their health costs in
late life, according to Hou.
Not only that, but retirees’ shorterexpected life span also intensifies theirmarket risk expectation because itshortens their investment horizon. Italso reduces their subjective health riskbecause they perceive a lower chanceof facing uncertain medical expenses inlate life. Family risk and policy risk areat the bottom of the subjective list.
There are three policy implications of
Hou’s research. First, the discrepancy
in the objective and subjective rankings
demonstrates that retirees do not have
an accurate understanding of their true
retirement risks. This, in turn, underscores
the importance of educating the public on
the actual sources of retirement risks.
Second, a need exists for lifetime
income products, such as annuities, which
hedge longevity risk and market risk at
the same time. Hou says policymakers
should facilitate the inclusion of annuities
in retirement plans and makes them por-
table between employer retirement plans.
Third, although retirees face a majorrisk in long-term care, they oftenunderestimate its significance. “Betterdesigned public programs and privateproducts, possibly integrated withlife annuities, could be encouraged toprotect retirees with limited financialresources from this potentially cartographic risk,” Hou explains.
Michael S. Fischer can be reached at msf7@
How to Improve Women’s Retirement Savings
Women get the short end of the stick when it comes toretirement. It starts with differences in earnings and, thus,less money to save for retirement. But other factors comeinto play: They are more likely to leave the workforce to carefor children or parents, and they live longer.
A Brookings Institution paper gives several reasons forwomen earning less over their lifetimes, including interruptedcareers due to caregiving or childbearing, or part-time or low-wage work to maintain flexibility for those responsibilities, thepaper states. The median earnings of women who worked fulltime were 81% of their male counterparts’ in 2018.
When controlling for “age, education, job tenure, occupation, job title, location, and industry, the figure rises to
94.6%,” authors Grace Enda and William G. Gale write. Theycredit the difference in those figures to “social constraintsand biases” pressuring women into lower-paying jobs.
Due to the reduction in lifetime wages, Social Security benefits are, on average, for women 80% of men’s benefits, thepaper states. The “motherhood penalty” is applicable here aswell. The first child reduces Social Security benefits to womenby 16%. Each child thereafter increases the gap by 2%.
Not working or reduction in working also can lead to lower pay-
outs from defined benefit programs, such as pensions, or defined
contribution plans, such as 401(k) plans. Women also tend to live
longer than men: In 2020, average life expectancy at age 65 is 21. 1
years for women and 18. 6 years for men, according to the paper.
To close the gap, the report’s authors suggest:
1. Working should be made more attractive to women, andthis includes implementing “a robust federal paid familyand medical leave program [that] would let people savefor retirement and earn Social Security credits while providing care to children and relatives.”
2. High-quality child care should be subsidized so womencan remain in the workforce.
3. Revisions to the tax code “to provide a second-earnertax credit or to tax individuals rather than families wouldimprove incentives for married women to work.”
4. Also, as women make up a majority of those in the workforce not covered by an employer-sponsored plan, adoption of a nationwide automatic IRA program could makethem “eligible to participate in a tax-preferred workplaceretirement program.”
5. Finally, the social safety net must be strengthened, theauthors state. “For example, boosting SupplementalSecurity Income benefits to close the gap between SocialSecurity income and the poverty threshold could liftnearly 5 million elderly people, a majority of whom arewomen, out of poverty. —Ginger Szala