In retirement, you’re going to face many risks, such as outliving your money, investment losses, unexpected health expenses, unforeseen needs of family members, and maybe even retirement benefit cuts. How important are those risks and do retirees properly perceive these risks when making their spending and investment decisions? Those are the questions Wenliang Hou, a former research economist at the Center for Retirement Research at Boston College and now a quantitative analyst with Fidelity Investments, sought to answer in a brief recently published by the Center for Retirement Research at Boston College.
In his research, Hou quantified the magnitude of the objective risks that retirees face as well as retirees’ subjective perceptions of the risks, and then compared the two. And what he discovered is this: There’s a significant disconnect between actual and perceived risk. The biggest risk in the objective ranking is longevity (the risk of living longer than expected and exhausting one’s resources), followed by health risk and market risk. But, at the top of the subjective ranking, Hou wrote, is market risk, which reflects retirees’ exaggerated assessments of market volatility. And then, “perceived longevity risk and health risk rank lower, because retirees are pessimistic about their survival probabilities and often underestimate their health costs in late life.” he wrote. According to Hou, the implications of this analysis are threefold. Education “First, retirees do not have an …