New Retirement Savings Plans Are Needed To Ensure Financial Security

New Retirement Savings Plans Are Needed To Ensure Financial Security

While the vast majority of Americans who save for retirement do so through a 401(k) or similar plan provided by their employer, additional types of saving plans may be needed to help the millions of workers who are not adequately saving in workplace plans build a financially secure retirement, according to an article published on March 14 by The Pew Charitable Trusts.

The article, “3 Ways People May Save for Retirement in the Future,” was written by John Scott, director of Pew’s retirement savings project. Scott observed that “we may have reached the limit of what our employer-sponsored system can do to support a secure retirement,” as currently only about half of private sector businesses offer retirement benefits, and even though around 140 million people participate in retirement plans, the proportion of the employed workforce covered by these plans has never exceeded 70%.

Scott argued that while Congress could increase incentives to encourage more employers to sponsor plans, he noted that previous research has shown that small employers are often reluctant to offer retirement benefits because of the plan startup costs and administrative burdens, and that it is not clear that offering them a new tax break would overcome these concerns.

Given that is unlikely that many more employers will start voluntarily offering retirement benefits or that many more employees will start saving on their own, Scott said, new approaches that build on the elements that are known to work in the current system should be considered. Specifically, he recommended the development of a low-cost, portable, individual-based system, managed by a third party, that allows workers to automatically contribute to their own retirement account with each paycheck, and that gives employers the option to add to those accounts through a matching contribution.

While acknowledging that no current initiative fully captures these ideas, Scott noted that recent actions at the state and Federal levels point to the outlines of a system that could cover more workers, without relying solely on individual employers to sponsor their own retirement plan.

Among these initiatives, Scott said, are state-level retirement savings programs for employees without a workplace plan. He reported that California, Connecticut, Illinois, Maryland, and Oregon are implementing programs in which workers are automatically enrolled at a default rate of contribution, typically around 5% of pay, and with the ability to opt out at any time. In these programs, employers facilitate worker contributions through their payroll systems, but otherwise are not involved.

Scott also mentioned that a new approach may come from Congress, as the Retirement Security Act, which would allow any group of employers to share plan costs in group plans known as multiple employer plans, or MEPs, was recently introduced in the Senate. He observed that these plans could be especially helpful to smaller employers wary of the administrative costs of offering a stand-alone plan.

Finally, Scott pointed out that there are more than 10 million independent or contingent workers in the U.S. who have very low rates of retirement benefit coverage. To help these workers save in a changing economy, he recommended the development of retirement savings models that expand coverage options, possibly using new entities affiliated with associations, unions, or industry sectors

From Benefit Trends Newsletter, Volume 62, Issue 4

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2019 Liberty Publishing, Inc. All rights reserved.

Personalized Guidance for Retirement Plan Participants

Personalized Guidance for Retirement Plan Participants

Many Americans remain cautious about their investment decisions in the wake of the financial crisis, and members of the millennial generation in particular may need personalized guidance from employers in making retirement planning decisions, according to a study on retirement plan participation recently released by Broadridge Financial Solutions.

The findings of the report, “Retirement 2020: Capitalizing on trends to maximize participation, boost efficiency and accelerate outcomes,” are based in part on a survey of 1,003 U.S. respondents aged 22-59 that was conducted July 10-16, 2018. The survey findings indicated that whereas 72% of baby boomer respondents have confidence in a workplace retirement plan, only 58% of millennial respondents feel the same way.

The report emphasized that the millennials surveyed expressed investment preferences that run counter to conventional financial advice. For example, researchers noted, the millennial respondents said they are equally confident investing in a private business as they are in the global stock market, and many prefer traditional low-yield savings accounts to employer-sponsored plans. The survey results showed that among all respondents, just 24% reported seeking financial advice from a professional advisor, while 27% said they seek financial advice from family and friends.

The report cited a previous study showing that the main reasons why workers of all ages decrease their retirement plan contributions are needing to pay down debt/bills (27%), needing money for day-to-day expenses (25%), facing a major life event (18%), and having less income (16%). The report noted that debt is a big problem for millennials in particular, as one-half of millennials with a bachelor’s degree, and one-quarter of all millennials, hold student debt; and the median loan balance for millennials with a bachelor’s degree is $25,000.

Researchers observed that the financial crash in 2008 hit investors hard, both psychologically and financially, as the survey showed that a significant number of investors now distrust Wall Street and have an inflated view of market risk: nearly 25% of all respondents said they think it is likely that they will face another market crash like the one that occurred in 2008, and 20% said they believe the stock market is a rigged game they cannot win.

The report also noted that because workers often fail to seek professional advice, many are not aware of, and are thus are unable to evaluate, the available investment options. For example, researchers observed, a recent survey showed that more than 40% of investors have no familiarity with health savings accounts (HSAs) and their triple-tax advantage, and only 30% make regular contributions to a HSA. This survey also found that of those respondents, 65% said they use their HSA funds to cover current health care needs, while only 8% indicated that they use their HSA to save for the future.

Given these challenges, the report recommended that retirement plan sponsors take advantage of technology tools that will allow them to engage plan participants by creating personalized experiences, while streamlining operations and lowering costs. Researchers advised plan sponsors to consider using data-driven content creation platforms to facilitate workflow automation, and cloud-based tools to enable multiple compositors to collaborate from any location.

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2019 Liberty Publishing, Inc. All rights reserved.

 

 

Retirees Report Having Multiple Sources of Income In Retirement

Retirees Report Having Multiple Sources of Income In Retirement

Along with Social Security, guaranteed income from pensions and annuities are key sources of income for retired Americans, the results of a survey conducted by the Insured Retirement Institute (IRI) showed.

The survey was completed in August 2018 by 820 Americans aged 65-85 with investable assets of at least $50,000. The survey report, “Retirement, Income, and Risk,” is part of a series of studies examining the retirement experiences of people who have been living in retirement for a meaningful length of time, with this year’s report focusing on retirees’ reliance on guaranteed sources of income.

The survey found that relatively few respondents have taken a significant “pay cut” since retiring, with 43% saying their income is either the same or has increased, 32% indicating that they have seen a 25% reduction in income, and just 21% reporting that they have seen their income decrease by one-half or more.

The results also showed that more than 90% of respondents are collecting Social Security benefits, and that of those who are not, about half are eligible but have not yet filed. Among the survey sample, the average married couple receiving Social Security benefits reported receiving $28,080 per year. Almost half of the respondents said Social Security accounts for less than 25% of their household income, and just 16% said these benefits account for 50% or more.

Meanwhile, 81% of the retirees surveyed reported that they receive at least some income from a pension, with 64% saying they depend on a pension for at least 25% of their income, and 40% saying they rely on a pension for 50% or more of their retirement income. The survey also found that one-third of respondents reported owning an annuity, although just 15% said they are receiving lifetime income payments from an annuity.

When retirees who have defined contribution plan accounts were asked about the frequency of their withdrawals, only 39% indicated that they are taking systematic withdrawals from their balances. Of those who reported making systematic withdrawals, 59% said they are doing so to satisfy the Required Minimum Distribution rule, and 66% said they are withdrawing 6% or less of the funds in the accounts annually. Moreover, 59% of these respondents reported that their withdrawals are in line with their expectations, while 21% said they are withdrawing less than anticipated, and just 20% reported that they are withdrawing more than expected.

The results further pointed to the importance of financial advisor relationships for retirees. The survey showed that 72% of respondents who retired with at least $100,000 in investable assets said they either have or had a relationship with a financial advisor, with 63% reporting that they continue to work with a financial advisor.

The survey also found that very few of the retirees polled are working, with 73% saying they receive no income from employment and only 4% saying employment accounts for 50% or more of their income. Of those respondents who said they are receiving no income from employment, just 15% said they have ever looked for paying work since retiring from a full-time occupation. Moreover, most of the respondents indicated that they have not moved in retirement: 63% said they are still living in the same home they lived in prior to retirement, while 25% said they have sold their home to move to a smaller place.

In addition, the survey showed that most of the respondents feel relatively secure in retirement, with more than one-half saying they believe they are better off financially now than at the point of retirement, and 36% reporting that they are about as well off now as when they retired. Interestingly, 72% of respondents said they feel more financially secure in retirement than their parents were or are.

Researchers cautioned, however, that many retirees may be underestimating the risks they face from high medical and long-term care costs. They noted, for example, that while there is a 68% chance that an American aged 65 or older will become disabled in at least two activities of daily living, only 25% of respondents said they think it is likely that they will need long-term care. Thus, researchers warned, “the risk of exhausting financial assets due to a long-term care event is quite real, and underappreciated.”

From Benefit Trends Newsletter, Volume 61, Issue 12

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

How Delaying Retirement Can Affect Longevity and Health

How Delaying Retirement Can Affect Longevity and Health

Delaying retirement appears to increase longevity among men in particular, but it does not seem to have any significant impact on the likelihood of developing health problems like diabetes and depression, a study published in October by the Center for Retirement Research at Boston College has concluded.

The working paper, “How Does Delayed Retirement Affect Mortality and Health?” was written by research economists Alice Zulkarnain and Matthew S. Rutledge. The authors observed that older Americans have been retiring later for a number of reasons, including because work is becoming less physically demanding, employers have shifted from defined benefit to defined contribution pensions, and Social Security’s incentives are changing. The researchers cautioned, however, that understanding the implications of working longer for mortality and health is complicated because people who are healthier tend to work longer than people who are less healthy.

Taking advantage of a natural experiment in which a policy was implemented in the Netherlands that incentivized a broad cohort of early baby boomers in their sixties to delay retirement, the study used Dutch administrative data to explore the links between work and health outcomes related to depression and diabetes, applying an instrumental variable approach that took into account the joint relationship between work and mortality.

The findings showed that delayed retirement reduced the five-year mortality rate for men ages 62-65 by 2.4 percentage points, which represents a 32% reduction relative to the five-year mortality rate for non-working men of the same age. The authors noted, however, that the ultimate effect on male life expectancy depends on how permanent the effect is, as this reduction in mortality would increase life expectancy at age 60 by about three months if the effect applied only to the ages studied, but longer if the effect was permanent. For women, the results were inconclusive.

Moreover, the study found no significant relationship between delayed retirement and the health conditions studied, which suggests that these conditions were not responsible for the mortality reduction. The researchers speculated that this could be because depression and diabetes are not as acutely life-threatening as some other conditions, adding that further research is needed to identify the conditions through which the positive effect of working on mortality manifests itself. They also pointed out that the relationship between working and mortality could manifest itself through a variety of conditions, which may make it difficult to find a significant result for any one condition.

Based on these findings, Zulkarnain and Rutledge concluded that policies that delay retirement may increase longevity, especially for men, while having no detectable effect on depression or diabetes for people in their sixties. They recommended that U.S. policymakers who are considering changing the Social Security program to encourage workers to delay retirement take into account the possibility that doing so could extend the lives of retirees, and weigh the potential effects of reduced mortality on the benefits that are ultimately paid out.

From Benefit Trends Newsletter, Volume 61, Issue 11

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

Working-Age Americans Fall Short of Retirement Savings Targets

Working-Age Americans Fall Short of Retirement Savings Targets

The retirement savings of working-age Americans are far below the levels needed for a secure retirement, despite the recent economic recovery, according to the findings of a study published on September 17 by the National Institute on Retirement Security (NIRS).

Based on an analysis of U.S. Census Bureau data, the research report “Retirement in America: Out of Reach for Most Americans?” found that the median retirement account balance among all working individuals is $0; and that 59.3% of the working-age population (ages 21-64) in the U.S., or more than 100 million individuals, do not own any retirement account assets in an employer-sponsored defined contribution (DC) plan or individual retirement account (IRA), and are not covered by a defined benefit (DB) pension.

The analysis indicated that even after counting an individual’s entire net worth—a relatively generous measure of retirement savings—76.7% of working Americans fall short of conservative retirement savings targets for their age and income, based on working until age 67. The results further showed that among workers who have accumulated savings in retirement accounts, the typical worker has a modest account balance of $40,000. Researchers noted that 68.3% of individuals ages 55 to 64 have retirement savings equal to less than one times their annual income, or far below the level they will need to maintain their standard of living over their expected years in retirement.

Moreover, the analysis revealed that growing income inequality contributes to the gap in retirement account ownership. The report found that workers in the top income quartile are five times more likely to have retirement accounts than workers in the lowest income quartile, and that individuals with retirement accounts have, on average, more than three times the annual income of individuals who do not own retirement accounts.

Researchers attributed this retirement savings shortfall to a multitude of factors, such as the increase in the Social Security retirement age, and to a more general breakdown of the nation’s retirement infrastructure. They noted that there is a huge retirement plan coverage gap among American workers, with the share of workers who have DB pensions declining as employers replace these plans with 401(k) and other DC plans in which the risks and much of the funding burden fall on individual employees.

The report’s authors also emphasized that the financial crisis of 2008 exposed the vulnerability of the DC-centered retirement system, as the asset values in Americans’ retirement accounts fell from $9.3 trillion at the end of 2007 to $7.2 trillion at the end of 2008. Researchers noted that the economic downturn also triggered a decline in total contributions to DC retirement accounts as many employers stopped matching employee contributions. While observing that the combined value of 401(k)-type accounts and IRAs had risen to $16.9 trillion by the end of 2017, researchers pointed out that this increase in total retirement account assets has not translated into improved retirement security for the majority of American workers and their families who have no retirement savings.

The report’s authors recommended that policymakers and employers take steps to address these challenges. In addition to calling for the strengthening of Social Security, they suggested expanding access to low-cost, high-quality retirement plans, including DC savings plans, DB pensions, and hybrid or combination DC/DB plans. They also recommended helping low-income workers and families save with improved tax credits. In particular, they observed, expanding the Saver’s Credit and making it refundable could help boost the retirement savings of lower-income families. They also noted that a number of states are taking action to expand access to workplace retirement savings, with enrollment in state-based programs starting this year in Oregon, Washington, and Illinois.

From Benefit Trends Newsletter, Volume 61, Issue 10

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.