With the median net worth of American families showing signs of stagnation and traditional pension plans disappearing, even as the growing number of retirees places pressure on the Social Security system, workers who are currently trying to plan for retirement are facing an uphill battle, according to a report released by the Society of Actuaries Committee on Post Retirement Needs and Risks (CPRNR), the Urban Institute, and the Women’s Institute for a Secure Retirement (WISER).
“The Impact of Running Out of Money In Retirement,” published in November 2012, summarizes the findings of academics and practitioners in areas of government policy, actuarial science, and financial services relating to the difficulties middle-income Americans in particular face in saving for retirement, and ways to help these workers achieve their retirement income goals.
“There is no denying that the aging of the population, the decline of the defined benefit pension plan, the stress the growing number of retirees will put on our social benefit systems, the potential for unanticipated personal, political, and economic events near or after retirement, and the struggling world economy have created growing and unanticipated challenges to an individual’s ability to manage his or her financial resources for the duration of retirement,” the report’s authors said.
Researchers further observed that today’s retirees are facing higher costs for fuel and food, an increasing share of growing medical costs, and lower housing values. “How will they manage their retirement income given these pressures?” the report asked. “What options are available to them to help them adjust to these changes?”
The report showed that 71% of older adults are adequately prepared for retirement, but that outcomes vary substantially by marital status, as 80% of married adults are adequately prepared, compared with only 55% of single adults. In addition, outcomes differ substantially by other demographic characteristics, with women being far more likely than men to lack sufficient savings and assets for retirement, e.g., only 29% of single older women without high school degrees are adequately prepared for retirement.
As defined contribution plans place the major responsibility for accumulating and managing retirement assets on the employee, the need for education and guidance is more important than ever. This may be especially evident in the middle-income group, who are resource constrained, and may not be able to afford impartial advice from planning professionals, and yet lack the information or skills to make decisions on their own, the experts warned. Members of this group are therefore more likely than the high-income group to rely on friends, family, or the Internet for advice on pre-retirement financial decisions.
“Traditional financial planning approaches are heavily focused on managing assets and, thus, work best with clients with significant financial assets,” the report concluded. “They may not address key needs for people with limited or no assets, even though these individuals have major decisions to make and may not have the resources or the desire to pay advisors.”
While emphasizing that there are no easy solutions to these problems, the report’s authors recommended that defined contribution plan sponsors consider a variety of strategies to help middle-income workers prepare for retirement more effectively. These include implementing auto-enrollment, using target-date funds as default options, and limiting fund choices. In addition to providing benefits, employers can act as purchasing agents for financial products, and offer access to education and advice.
In addition, employers could allow older employees to approach retirement as a gradual process, by moving to a flexible or part-time schedule in the latter years of their career. This would enable older workers to delay claiming Social Security, and weigh their options for the distribution of their retirement savings, which may include partial annuitization.