Do Investors Really Understand the 5 Risks of Retirement?

In this research, market risk ranks highest — reflecting what Hou calls retirees' "exaggerated assessments of market volatility." 

Perceived longevity risk and health risk, in second and third places, rank lower because retirees are pessimistic about their survival probabilities and often underestimate their health costs in late life, according to Hou. 

Not only that, but retirees' shorter expected life span also intensifies their market risk expectation because it shortens their investment horizon. It also reduces their subjective health risk because they perceive a lower chance of facing uncertain medical expenses in late life.

Family risk and policy risk are at the bottom of the subjective list.

Policy Implications

There are three policy implications of Hou's research.

First, the discrepancy in the objective and subjective rankings demonstrates that retirees do not have an accurate understanding of their true retirement risks. This, in turn, underscores the importance of educating the public on the actual sources of retirement risks. 

Second, a need exists for lifetime income products, such as annuities, which hedge longevity risk and market risk at the same time. Hou says policymakers should facilitate the inclusion of annuities in retirement plans and makes them portable between employer retirement plans.

Third, although retirees face a major risk in long-term care, they often underestimate its significance. 

"Better designed public programs and private products, possibly integrated with life annuities, could be encouraged to protect retirees with limited financial resources from this potentially cartographic risk," Hou explains.