Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

<h4 class="wp-block-heading"><a href="https://www.pewtrusts.org/en/research-and-analysis/articles/2023/12/22/retirement-assets-in-state-automated-savings-programs-hit-1-billion" target="_blank" rel="noreferrer noopener">Retirement Assets in State Automated Savings Programs Hit $1 Billion | The Pew Charitable Trusts</a></h4>



Automated retirement savings programs, such as Colorado SecureSavings, have amassed more than $1 billion in total assets since states started launching the plans just a few years ago. The programs aim to help private-sector workers who don’t have access to a retirement plan at work, and so far have automatically enrolled more than 800,000 workers.



<h4 class="wp-block-heading"><a href="https://www.copera.org/news-you-should-know-states-auto-enroll-retirement-plans-surpass-1-billion" target="_blank" rel="noreferrer noopener" class="broken_link">Medicare Adding New Types of Mental Health Providers on Jan. 1, 2024 | Axios</a></h4>



As of Jan. 1, Medicare covers marriage and family therapists and mental health counselors in addition to the psychologists, psychiatrists and other providers who had previously been covered. It’s the first expansion of Medicare’s coverage for mental health providers since the late 1980s.



<h4 class="wp-block-heading"><a href="https://coloradosun.com/2024/01/09/meals-on-wheels-covid-dollars/" target="_blank" rel="noreferrer noopener">Services For Older Coloradans Are Shrinking as COVID Aid Ends | The Colorado Sun</a></h4>



Local agencies that provide meals, rides, and other services to aging Coloradans are asking policymakers for more money as COVID funds run out and the demand for services grows. Officials say there’s not enough funding to serve everyone in need, and some agencies now have thousands of people on waitlists.



<h4 class="wp-block-heading"><a href="https://www.nextavenue.org/longevity-literacy-is-key-to-retirement-readiness/" target="_blank" rel="noreferrer noopener">Longevity Literacy Is Key to Retirement Readiness | Next Avenue</a></h4>



How well do you know your life expectancy? Experts say longevity risk — the possibility of living longer than expected and running out of money — is one of the biggest risks retirees without access to a lifetime benefit like PERA face, and too many people underestimate how long they’ll live. By boosting their longevity literacy, workers can enter retirement feeling much more confident and prepared, researchers say.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



News You Should Know is a digest of news from publications around the nation about finance, investing, and retirement.

News You Should Know: States’ Auto-Enroll Retirement Plans Surpass $1 Billion

When planning for retirement, it’s important to have a good sense of one’s income sources, expenses, and the various risks to one’s finances over the course of retirement, which could last for two or three decades.



Researchers have identified five major financial risks retirees face: Longevity risk (living longer than expected and running out of savings), market risk (ups and downs in the market affecting account balances), health risk (unexpected health care costs), family risk (financially supporting relatives), and policy risk (potential changes to benefits like Social Security).



Recent research from the Center for Retirement Research at Boston College finds many retirees have an inaccurate sense of which risks pose the biggest threats, which could leave them unprepared. In <a href="https://crr.bc.edu/briefs/how-well-do-retirees-assess-the-risks-they-face-in-retirement/" target="_blank" rel="noreferrer noopener">a survey of about 20,000 people over the age of 50</a>, retirees routinely underestimated their life expectancy and health care costs, while overestimating the effects of the stock market on their finances.



Survey respondents ranked market risk as the biggest risk they face, followed by longevity and health. In what the study author calls an “objective” ranking, longevity risk tops the list, followed by health and market risks.



As people increasingly rely on defined contribution plans like 401(k)s and IRAs for retirement savings, having an inaccurate understanding of these risks can have serious implications for a retiree’s finances.



Defined benefit retirement plans like the one offered by Colorado PERA use strategies that address these risks, particularly longevity risk, to provide retirement security throughout a member’s retired years.



<h4 class="wp-block-heading">Longevity risk and PERA</h4>



PERA’s defined benefit plan provides a retirement benefit that a retiree cannot outlive. That means when a member retires, PERA will continue to provide monthly income until the retiree dies, regardless of how long they live.



Defined benefit plans accomplish this by pooling funds and thereby sharing risk. All contributions, interest, investment gains and other dollars are held in a trust fund that is used to make benefit payments for members. Because all retirees are drawing income from the same source, they share longevity and market risk. For example, a retiree who lives longer than expected will draw more income from the fund while a retiree who dies sooner than expected will draw less – essentially balancing each other out.



To fund each member’s retirement, defined benefit plans like PERA only have to plan for the average life expectancy of the group, not each individual’s expected lifespan.



Ensuring the defined benefit trust funds have enough money to pay retirement benefits for decades to come means making sure PERA has an accurate picture of its membership and potential changes in the future. PERA must be able to estimate how long members will live, how much of a benefit they’ll earn, and other factors.



That’s where actuaries come in. These highly skilled mathematicians have the important task of calculating the plan’s liabilities (how much money is owed to benefit recipients) and determining how much money the plan will need on hand to meet those liabilities.



<blockquote class="wp-block-quote">Read more: <a href="https://peraontheissues.com/explaining-the-role-of-actuaries-in-retirement-plans-like-pera/" target="_blank" rel="noreferrer noopener">Explaining the Role of Actuaries in Retirement Plans like PERA</a></blockquote>



Among PERA retirees, the average age at which members retired in 2021 was 59, and the average age of death was 83, so PERA may have to pay a retiree benefits for more than 20 years, on average.



Those numbers won’t always be the same, however. Factors such as life expectancy change over time, so it’s important for plans like PERA to periodically review and adjust. PERA embarks on this process every four years with what is known as an experience study, which compares what actually happened in a given time frame against what PERA projected would happen.



PERA&nbsp;<a href="https://peraontheissues.com/2020-experience-study-preparing-for-a-secure-future/" target="_blank" rel="noreferrer noopener">last conducted an experience study</a>&nbsp;in 2020, and the Board of Trustees adopted several new assumptions as a result. This process will take place again in 2024.



In addition to longevity risk, PERA can help members plan for other types of financial risk, as well. The <a href="https://www.copera.org/peraplus-401-k-457-plans" target="_blank" rel="noreferrer noopener">PERAPlus 401(k) and 457 plans</a> provide low-cost options to set aside extra money for retirement. This can help with large or unexpected expenses, such as health care or rising costs of goods and services.



By pooling assets and regularly monitoring and adjusting as needed, PERA can help alleviate the stress associated with retirees’ biggest financial risk and continue to provide reliable monthly income they can’t outlive.

How Retirement Systems Like PERA Plan for the Biggest Financial Risks Retirees Face

<h4 class="wp-block-heading"><a href="https://coloradosun.com/2022/06/23/colorado-option-public-health-insurance/" target="_blank" rel="noreferrer noopener">Federal Government Approves Colorado Option Health Insurance Plan | The Colorado Sun</a></h4>



The federal government has given its approval to Colorado’s plan to offer standardized lower-cost health care plans in the state. Colorado Option plans will be available to those who shop for insurance on their own and will be required to offer premiums that are lower than what insurance companies charge for other plans.



<h4 class="wp-block-heading"><a href="https://www.barrons.com/articles/retirement-longevity-risk-stock-market-51657907372?tesla=y" target="_blank" rel="noreferrer noopener">Why Retirees Should Worry More About Longevity and Less About the Markets | Barron&#8217;s</a></h4>



Recent research finds many retirees may be underestimating the biggest risk they face in retirement: living longer than they plan for. The survey, which took place prior to 2022’s market losses, found retirees rank market volatility as their top risk, followed by longevity and the cost of health care, while the research suggests longevity should take top billing, followed by health and then market risk.



<h4 class="wp-block-heading"><a href="https://www.npr.org/sections/health-shots/2022/07/15/1111316589/988-suicide-hotline-number" target="_blank" rel="noreferrer noopener">The New 988 Mental Health Hotline is Live. Here’s What to Know. | NPR</a></h4>



As of this month, anyone experiencing a mental health crisis can dial 988 for help. The new three-digit number replaces the former 10-digit hotline and connects callers to a network of local call centers around the country. The federal government is investing hundreds of millions of dollars to support the service.



<h4 class="wp-block-heading"><a href="https://www.nextavenue.org/stay-the-course-or-pivot-a-mid-year-financial-check-in/" target="_blank" rel="noreferrer noopener">Stay the Course or Pivot? A Mid-Year Financial Check-In | Next Avenue</a></h4>



We’re halfway through 2022, and it’s a good time to check in on your finances to see if you’re on track to meet your goals. Here are some key questions to ask yourself when assessing your financial situation.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



News You Should Know is a digest of news from publications around the nation about finance, investing, and retirement.

News You Should Know: Federal Authorities Approve Lower-Cost Colorado Option Health Insurance

Consider these two questions:



Question #1



Which of the following poses the biggest retirement risk in the United States?



<ul>
<li>Market risk (investment losses)</li>



<li>Family risk (unforeseen needs of family members)</li>



<li>Longevity risk (outliving savings)</li>



<li>Health risk (unexpected health expenses)</li>



<li>Policy risk (changes in law that affect retirees)</li>
</ul>



Question #2



What is the average life expectancy for someone who is 65 today?



The Answers – and Why They Matter



New <a href="https://crr.bc.edu/wp-content/uploads/2020/07/wp_2020-14.pdf" target="_blank" rel="noreferrer noopener">research</a> shows that longevity risk poses the biggest threat to retirees. However, most people perceive market risk as the biggest risk to their retirement.



The answer to Question #2 underscores why retirees should take Question #1 seriously: Data shows that the average 65-year-old woman will live to be 86.1, and the average man lives to be 83.5.


<div class="wp-block-image is-style-default">
<figure class="alignright size-large is-resized"><img decoding="async" loading="lazy" src="https://content.copera.org/americans-underestimate-this-retirement-risk-do-you/"" class="wp-image-3929" width="337" height="329"/></figure></div>


The average response to this question, however, shows that people underestimate this reality: 65-year-old women guess 78.2 while men guess 77.4.



That gap—six to eight years—represents a retirement that’s longer than retirees anticipate. If relying heavily on defined contribution accounts, a retirement plan that accounts for 12 years of spending instead of 20 can lead to serious problems down the line.



The Benefit of Lifetime Income



Retirement plans that rely heavily or completely on defined contribution accounts carry more individual risk: increased market risk, increased longevity risk. A person might enter retirement with seemingly adequate 401(k) savings. The first 10 or 15 years of retirement could even go exactly as planned. But retirements can last longer than expected. Investments can underperform at any point. Savings can dry up.



Retirees in a defined benefit plan like PERA’s receive a steady stream of income they can’t outlive. Member contributions, employer contributions, and investment returns together help fund the retirement for thousands of members. The individual does not bear the risk of outliving retirement savings in plans like these.



Those who are fortunate to have a retirement that’s longer than average—and the average PERA member has a <a href="https://content.copera.org/americans-underestimate-this-retirement-risk-do-you/" target="_blank" rel="noreferrer noopener">higher life expectancy</a> than the average American—know the value of a defined benefit plan first-hand. Currently, more than 17,000 PERA retirees are between 80 and 89. Nearly 4,000 are between 90 and 99. About 100 are 100 or older.



What Lifetime Income Means to PERA Members



Michael Judish has been a PERA Customer Service Representative for 15 years. During his tenure he’s spoken with countless PERA retirees and family members who have commented on the value this type of benefit provides.



Judish said that the annual statements retirees receive often prompt calls to PERA. The statements show how much retirees put into their account and how much they’ve received in retirement. On average, retirees receive all of their contributions, plus interest, back in the first five years of retirement. But the benefit lasts a lifetime, whether that means 10, 20, 30 years or more.


<div class="wp-block-image">
<figure class="alignright size-large"><img decoding="async" src="https://content.copera.org/americans-underestimate-this-retirement-risk-do-you/"" class="wp-image-3921"/><figcaption class="wp-element-caption">Michael Judish PERA Customer Service Representative</figcaption></figure></div>


“Many retirees will call in and ask ‘am I still receiving a benefit?’” Judish said. “Many can’t fathom how much they have received compared to how much they put in. There is a lot of appreciation when they see the actual numbers.”



Family members of retirees who have recently died often express similar sentiments. “Children maybe realize that they didn’t need to come up with money for their parents because their parents had a lifetime benefit,” Judish said. “Although many of these relatives aren’t PERA members, they knew their relative had a benefit they could rely on, and they were grateful.”



Judish added that the benefits of lifetime income extend beyond the bank account. The peace of mind contributes to overall health, too. “People have told me that part of the reason they have a long life is PERA,” he said. “Knowing that they had a lifetime benefit took a lot of stress out of their life. The longer they live, the more grateful they seem to be.”

Tag Archives:

News You Should Know: States’ Auto-Enroll Retirement Plans Surpass $1 Billion

How Retirement Systems Like PERA Plan for the Biggest Financial Risks Retirees Face

News You Should Know: Federal Authorities Approve Lower-Cost Colorado Option Health Insurance

Americans Underestimate This Retirement Risk. Do You?

Subscribe to PERA On The Issues