12/18/2012 07:21 pm ET Updated Feb 17, 2013

Challenges Ahead for Retirees in Wake of Fiscal Cliff

The impending fiscal cliff, the prospect of tax reform and future debt ceiling debates are causing pre-retirees to feel uneasy about their financial planning strategies and funds for the future. If a compromise cannot be reached before January 1, 2013, there could be $607 billion in automatic annual tax increases and spending cuts will automatically take effect. Even if a compromise is reached before the end of the year, it is highly likely that both Medicare and Social Security will have benefits reduced in the future.

Because we cannot predict the future, it is important for retirees to always plan ahead to avoid running out of money during what should be the golden years. Those who are planning for retirement are worried that the fiscal cliff may bring possible hikes in tax rates on income, capital gains and dividends. So how should retirees plan their savings for retirement in order to weather any possible outcome of the fiscal cliff and avoid running out of money?

In order to explore what causes retirees to run out of money today and to identify actions that can help individuals avoid that situation in the future, the Society of Actuaries (SOA), Urban Institute and the Women's Institute for a Secure Retirement (WISER) recently sponsored a roundtable to produce a new report, "Impact of Running Out of Money During Retirement." Participants included actuaries, members of the academic community, individuals with a business interest in the retirement market, researchers and officials from practitioners of government policy, and researchers from "think tank" organizations.

The discussion centered on the two types of individuals who run into financial problems later in life: those who arrive at retirement without sufficient savings or other resources to support retirement, and those who have sufficient resources, but don't utilize them in the best way.

Finding ways to cure the first problem has been much discussed, and certainly represents a challenge, given that middle class wages have remained stagnant in real terms for at least a generation. Households have coped by working longer hours, having both members of couples work, and by making use of credit. However, with those sources of additional funds having been tapped out, it is not surprising that, in the present environment, people are having a hard time saving enough for retirement.

But even those who do save enough face daunting challenges in making the best use of those savings to support retirement. It can be an overwhelming task to determine the best way to manage savings to fund a retirement over an uncertain lifetime, especially for those in the middle market.

Planning finances for people with different levels of income are drastically different exercises. Lower-income individuals should be capitalizing on the use of government support programs, while the more affluent community has the luxury of working with financial advisors. Behavioral finance studies show, however, that the middle market consumer tends to turn to his or her peer group in order to understand retirement planning and advice. While commiserating with your peers can be therapeutic, it may not be the best way to learn about financial planning.

So why doesn't the middle market tend to seek out financial advisors in order to ensure they do not run out of money in retirement? Middle-income individuals and couples, who need help the most, are underserved in a market where being a successful professional means moving to upscale clients. It becomes a huge challenge to provide planning for middle-market clients that adequately recognizes individual needs, and does so in a cost-effective manner. Too often, in the middle market, the delivery of advice ends up being no more than the salesperson pushing his or her favorite product rather than providing a service that recognizes the needs of the individual buyer and offers alternatives.

So what can be done to better serve the middle market? There are a few initiatives in place that attempt to provide better retirement planning services for the middle market needs. Examples include services that provide low-cost streamlined financial planning and other services that provide online shopping for low-cost annuities. However, none of these services has yet been able to grow to the size needed to make a major market impact.

Additional possible solutions for serving the middle market include encouraging employers to provide advisory services by removing liability barriers; offering incentives and providing tax subsidies for those using financial advice; and making better use of social networking as a medium for discussing financial issues.

But until we arrive at a working solution to serve the middle market's needs, there are a few golden rules of advice for individuals to follow to ensure they live comfortably during their golden years.

  1. Working longer is important, as is claiming Social Security later in life to maximize its benefits. Life expectancy has skyrocketed, so individuals must plan for these expected extra years of life. Employees may need to look at working longer under different options, like scaled down work in a current job or looking for part time work in a different job.
  2. Furthermore, planning is sometimes more about avoiding bad decisions than making the best decisions. Individuals should be careful when choosing their second careers. For instance, retirees may be attracted to the idea of using their savings to fund a new business venture. This almost always turns out to be a bad idea. There are a lot more new ventures that fail than succeed. Retirees need to keep retirement savings safe.
  3. And finally, retirees can avoid a potential (perhaps the biggest) financial shock by purchasing long-term care insurance, and should give this type of insurance protection serious consideration.