Many Americans do not plan before they decide to retire, and they do not have clear strategies for handling risks, leaving them vulnerable to financial shocks later in life, according to a study by the Society of Actuaries and Matthew Greenwald and Associates.
The study was designed to explore how individuals make retirement decisions in order to gain better knowledge of the process they used to make decisions, what steps were included, how finances and other factors were considered and how successful they have been in later years.
Eight focus groups of "resource-constrained" retirees who had voluntarily retired were interviewed. Groups were separated by asset level, sex and geography. A comparison of recent versus more long-term retirees was also examined.
The findings reveal these "resource-constrained" retirees as careful and conservative financial managers in the short term who focus on current cash flows rather than on risks and changes over time. They are also flexible and able to reduce current spending to match current income, limiting what they spend for travel and meeting their dreams.
The study found that they are reluctant to draw down assets, saving them for emergencies or an inheritance, and do not plan for significant inflation, substantial long term care needs or large unexpected medical expenses. In addition, very few are using insurance to manage these risks.
The report concluded that given current longevity, it is likely that a considerable number of them will have difficulty financially in later years.
While working longer may not be a practical solution because of factors such as health problems of lack of job opportunities, more research is needed to identify better strategies to help both current and future retirees improve their retirement security, according to the report.
One solution could involve changes to the retirement system to encourage more informed decision-making, it said.
Another solution may point to the need to tailor messages based on sex since there was a clear difference between attitude and approach between men and women in these groups, with men more likely than women to think they will be able to adapt to any financial situation that arises.
Finally, workforce policy changes to encourage older individuals to work longer and better support their retirement timing decision may be necessary, the researchers said.