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By Joel Dresang

I went hiking near Holy Hill on an overcast day. I wore a floppy hat to keep the sun off my face in case the sky happened to clear. I figured the hat would protect me from rain, too. For secure footing, I wore some sturdy old hiking boots.

Not far into the walk, rain tapped the leaves above me then pounded down in waves. That’s when I realized my hat was not waterproof. But I had a hood on my windbreaker, so that kept me dry.

Also, I hadn’t remembered that those sturdy old boots leaked. Splashing through puddles that quickly formed along the trail, sloshing through spots where rivulets streamed across my path, I felt the rainwater soak through my socks.

We don’t think much about it, but every day we make assessments of the myriad risks we face. Some miscalculations are more consequential than soggy feet.

It turns out we generally misplace priorities when assessing what to expect in retirement.

“Retirees do not have an accurate understanding of their true retirement risks,” writes economist Wenliang Hou for the Center for Retirement Research at Boston College.

Hou used extensive surveys and data that built upon prior research to compare what retirees consider their biggest risks as opposed to what their biggest risks statistically are.

Retirees said their greatest concern was the investment market, its precariousness, whether their holdings are down at any given moment. Second, they worried about their longevity — whether they’d outlive their wealth. Third, they dreaded health care costs and the possibility that medical bills would drain their coffers.

According to Hou’s research, retirees actually should be most anxious about longevity, then health costs and then the markets.

“In short, retirees overestimate market volatility and underestimate how long they will live and their health costs,” Hou says. He notes “a significant disconnect between actual and perceived risk.”

A benefit of working where I do is spending my days alongside professionals who prepare people for retirement and then advise them through decades of living off their investments.

Other Money Talk articles from Joel Dresang

As I get closer to retirement myself, whenever that may be, I know from the confidence of my coworkers not to panic about the inevitable — sometimes breathtaking — setbacks in market indicators.

In fact, when stocks swooned in early 2020, I began a practice of checking my retirement accounts each quarter. I watched prices recover from that briefest of bear markets and reach new heights again earlier this year.

When I peeked again midyear, I saw my portfolio down 10% from where I started 2022. That was disappointing, although not as depressing as the 20% slide the S&P 500 took in the same period, the worst first half of a year since 1970.

Still, rather than let the decline make me fret about how much more ground I could lose, I have continued plowing my pay into my 401(k) and health savings account.

Hou attributes the disconnect between what concerns retirees most and what should concern them most to lack of financial literacy and personal biases. In an interview, he said investors tend to have negative market expectations because of media coverage, which can be preoccupied with bad news and short-term trends.

Easy instant access to market information doesn’t help either. As the work of behavioral economists Shlomo Benartzi and Richard H. Thaler has suggested, the more investors look at their account balances, the more likely they are to abandon their plans and thus their prospects for long-term gains. Because investors suffer more pain from losses than the joy they feel from positive returns, finding declines in their portfolios can freak them out.

On any given day, the S&P 500 is down 46% of the time, according to BofA Global Research, as reported recently in the Wall Street Journal. But you’d find the S&P down only 25% of the time if you looked at it just once a year; 6% if you checked in every 10 years.

So, by undervaluing their plans and their portfolio’s time in the market, investors risk losing out on long-term payoffs. That exacerbates the trouble from another of Hou’s findings: By underestimating the length of their retirement and the medical costs they’ll incur in that time, investors risk outliving the resources they set aside.

In fact, the National Retirement Risk Index, a triennial report from the Center for Retirement Research, has consistently found that about half of U.S. households risk losing their standard of living in retirement. Especially as the burden of retirement income has shifted to individual investments rather than employer pensions, researchers say, Americans have needed to work longer and save more to replace their paychecks in retirement.

Retirees also contend with unanticipated financial surprises —long-term care expenses, divorce, a family member needing help — which can upset their plans. The latest Retirement Risk Survey, from the Society of Actuaries Research Institute, found that more than 40% of retirees experienced some type of unexpected financial shock; 11% of them said the setback reduced their assets by 25% or more.

“Retirees acknowledge change, but their focus tends to be more short-term, making it hard to anticipate change in advance,” the report from the actuaries says. “This leaves them unprepared to manage changes in the future.” Prior research by the group showed retirees tending to improvise how they deal with unexpected events as they happen.

In my 13 years at Landaas & Company, I have learned that a critical role of investment advisors is to help clients manage expectations. Managing portfolios is one thing. Managing investors’ behavior is another.

For my money, considering Hou’s findings and other research, here are my personal takeaways:

  • Plan to live longer than my parents. My father died just after his 88th My mom lived past 94. I’ll figure I’m going to live at least up to those ages.
  • Know that living longer is going to cost me more, especially with health care. I’ll do what I reasonably can do to be fit and fruitful as I age so I can help control costs. I’m also taking advantage of a health savings account to invest pre-tax income to help cover those costs.
  • Set — don’t sweat — my investments. I’ll work with my advisor to communicate my plans and keep them on track — and not let short-term market disruptions distract me from long-term objectives.

And one other note: I still wear those sturdy old hiking boots. They’re broken in and comfortable and warm. But if there’s a chance of dampness ahead, I have a newer pair that’s waterproof.

Joel Dresang is vice president-communications at Landaas & Company.

Learn more
Retirement 101: Having a plan, a Money Talk Video by Tom Pappenfus
Knowing the number, by Brian Kilb
Having the confidence to retire, a Money Talk Video by Art Rothschild
Retirement investing: Where to begin, a Money Talk Video by Kyle Tetting
Facing fears or falling to them, by Joel Dresang
Health savings accounts — Triple benefits, by Isabelle Wiemero
(initially posted July 27, 2022)

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