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What We Can Learn From Older Americans' Financial Regrets

Researchers at the National Bureau of Economic Research just published the results of a study conducted with participants in the University of Michigan's Health and Retirement Study, and their findings are intriguing. They asked 1,764 respondents, all of whom who over the age of 50 and had an average age of 72, about their biggest financial regrets.

Their financial regrets were, in descending order of how many participants chose them, as follows:

1. not saving enough (57% of respondents),

2. not buying long-term care (LTC) insurance (40%),

3. not working longer than they did (37%),

4. not buying a life annuity (33%), and

5. claiming Social Security benefits too early (23%).

Moreover, when the researchers showed the participants information about how long they were likely to live, the number of participants expressing regret for not buying LTC insurance and a life annuity more than doubled.

Let's delve into each of these regrets to see what we can learn from them.

Not Saving Enough

This is certainly a justifiable regret for most older Americans. In 2020, 50% of those aged 70-74 had a net worth, excluding home equity, of $100,000 or lower. If they withdrew 4% of a $100,000 broadly invested portfolio each year, it would only provide $4,000 of annual income. It's no wonder that more than 60% of retirees get over half their income from Social Security benefits.

Broadly speaking, Americans are horrendous at saving. In October of 2022, the Bureau of Economic Analysis reported that Americans were only saving 2% of their income. By contrast, the saving rate in France is currently over 15%, and it's over 34% in South Korea.

The problem doesn't lie solely with Americans' spending simply being too high. It's also due to the combination of the death of the private pension and seniors living longer. In 1970, around 50% of private industry workers had a pension, also known as a defined-benefit plan. But for various reasons, this has declined to the point that only 15% of private industry workers in 2021 had access to a pension.

Pensions have been largely replaced with defined-contribution plans like 401(k) and the 403(b) plans. Most employers with such plans only contribute a tiny proportion of workers' wages to such plans, leaving employees to make most of the contributions needed to provide them with an adequate level of retirement assets. And in 2020, only 51% of private industry workers participated at all in any type of workplace retirement plan.

Granted, workers can also save into IRAs, other tax-advantaged accounts, and taxable accounts, but only 38% of American workers have an IRA.

And though the massive gains in life expectancy seen over the last 150 years have largely come from reducing deaths among infants and young children, those who are older are also living longer. Life expectancies of the elderly have increased since 1950 at the rate of about one additional year per decade (i.e., a 70 year old is likely to live about 7 years longer today than in 1950).

Not Buying LTC Insurance

As noted in my recent LTC series, the financial risk of LTC is quite high. About 50% of Americans will need formal LTC during their lifetimes, and of those who need such care, over 50% were projected in 2017 to spend over $100,000 for LTC over their lives.

While LTC insurance can certainly help to alleviate some of the financial risk of LTC, plans that will pay for an extended period of LTC are not inexpensive, and many are quite complicated, as discussed here.

But more importantly, many fail to realize that the main purpose of LTC insurance is not to ensure that policyholders will be able to get LTC but rather to reduce the likelihood of them having to exhaust their assets to pay for LTC. In other words, it's more about asset protection than anything else. LTC insurance can certainly be helpful to who have significant assets that they wish to protect, but this is not applicable to the majority of today's retirees. Most simply don't have enough assets to justify buying LTC insurance. Rather, they have little choice but to rely on Medicaid in the event that they need intensive LTC for a lengthy period, though there are still some strategies they can use to protect at least some of their assets.

Waterfalls near Hana, HI

Not Working Longer

Given that most Americans have relatively little saved for retirement by the time they reach age 65, working longer to save more, give their existing investments more time to grow, and enable them to delay their Social Security benefits can be immensely helpful to such people. But the fact that about half of older workers were essentially forced into retirement means that many will not be able to employ this strategy.

Not Buying a Life Annuity

As Tyler from Portfolio Charts has noted, "modern society is so income-focused that people sometimes think that way even when it doesn’t make sense." People spend most of their lives working for an income, they qualify for debt on the basis of income, kids want allowances, etc. It's not surprising, then, that a significant number of retirees wish that they could replace the income they had during their working years with something else, and the guaranteed income provided by a life annuity seems to fit the bill (though many seem to forget or are unaware that this guarantee is subject to the ability of the insurance company and, if necessary, state guaranty association to pay it).

Life annuities may be appropriate for some people, but there are some potentially big pitfalls. Most of the annuities sold today are variable annuities that have ridiculously high fees and incredible complexity that's usually there to line the insurance company's pockets, not the person buying the annuity. Given the high commissions from selling such annuities, it's no wonder that insurance salespeople push them so hard.

Single-premium immediate annuities (SPIAs) are a much better product than variable annuities and are easy to understand: you give the insurance company a big chunk of money, and they give you a monthly payout for the rest of your life. However, most SPIAs sold today have no cost-of-living adjustment that increases the payout over time, and none are linked to the Consumer Price Index, the most widely used measure of inflation. Without this, those who hold a SPIA for decades are almost certain to see the buying power of their payout decline markedly if they live a long time, which is precisely why they bought the SPIA in the first place! For instance, at a 3% rate of inflation, the buying power of a dollar would be reduced by 46% in just 20 years.

But beyond that, a great many retirees simply have not saved enough to buy an annuity of any sort that will provide them with a meaningful amount of lifetime income. As such, this regret only makes sense if the person had enough saved to buy an annuity of adequate size in the first place.

Claiming Social Security Benefits Too Early

Along with not having saved enough, this is likely the most justified regret among older Americans. As noted in this post, delaying Social Security benefits can be especially helpful in building a financially stable retirement since Social Security benefits last for one's lifetime and are adjusted for inflation annually. But unfortunately, most claim Social Security benefits before their full retirement age, taking a significant and permanent reduction to their benefits.

Being Unaware of Longevity Risk

Most people don't think about living a long time as being a risk, but from a financial perspective, it most certainly is. There is an estimated 16% probability that a 65 year old American will live to age 95, and this probability increases substantially for those who have substantial assets, are well educated, don't use tobacco, and who aren't obese. The longer you live, the more assets and/or the longer you need income to cover your spending needs.

Since over a quarter of those over age 50 significantly underestimate their life expectancy, it's no surprise that many claim Social Security benefits early; lots of people simply don't think that they'll receive them for many decades. But when the NBER researchers simply showed participants information regarding their projected longevity, the number of participants expressing regret for not being better prepared for retirement (as shown by their regret for not buying LTC insurance or a life annuity) more than doubled, indicating that many weren't aware of how likely it is that they would have a very long life.

Final Thoughts

Those who are younger can potentially learn a lot from the financial regrets of those who are older. While it's not surprising that the most common regret is not having saved enough money, this point cannot be overemphasized. Americans save an appallingly low amount of their income, especially when compared to other wealthy nations, and this commonly leads to regret in their latter years.

But if one is able to accumulate a significant amount of assets for retirement, it becomes reasonable to consider LTC insurance; it's not appropriate for those who have few assets to protect. Life annuities can make sense for those who are older but require a significant outlay of money that most retirees don't possess, and the only such annuities that most should even consider are single-premium immediate annuities with a cost-of-living adjustment. Many will do better to delay claiming their Social Security benefits for as long as they can (or until age 70, whichever comes first), which provide a guaranteed source of inflation-adjusted income for the remainder of their life.

That those who are young should learn from those who are older is a clear and repeated admonition from the Bible (e.g., 1 Kings 12:1-20; Job 12:12; Proverbs 16:31), and when they fail to do so, the results can be disastrous. One of the saddest verses in all the Bible is Judges 2:10.

"All that generation also were gathered to their fathers; and another generation rose up after them who did not know the Lord, nor even the work which He had done for Israel."

Virtually the entire book of Proverbs is a father's advice for his son. The apostle Paul advocated that older people in the church teach the younger (Titus 2:2-5).

"Listen to your father, who fathered you, and do not despise your mother when she is old."

-Proverbs 23:22

Let us learn from others and not repeat their mistakes.

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