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.

Many Americans See Social Security as Main Source of Income

Many Americans See Social Security as Main Source of Income

While most Americans are aware of the steps they should be taking to prepare for retirement, many are struggling to build adequate savings, and thus expect to rely heavily on Social Security after they stop working, a survey carried out by digital wealth manager Personal Capital has shown.

The survey of 2,008 U.S. adults aged 18 and older—including 1,630 pre-retirees—was conducted on March 1-7, 2018. When asked to identify their primary source of retirement income, 27% of the pre-retirees surveyed cited an employer-sponsored plan, but one-quarter cited Social Security, including 15% of millennial and 29% of Gen X respondents. The findings also indicated that 51% of all of the pre-retirees surveyed and 62% of the millennial respondents plan to retire at age 65 or younger, or at least a year shy of the age at which Americans born after 1943 are entitled to collect the full Social Security benefit.

Somewhat surprisingly, the survey results indicated that Gen Xers are almost as likely as Millennials to lack adequate savings, despite having less time to save before reaching retirement age. Even though more than half of respondents of both generations (56% and 57%, respectively) said they expect they will need to save more that $1 million for retirement, 34% of the Gen Xers and 39% of the millennials surveyed admitted they have no retirement savings. In addition, the Gen Xer respondents were less likely than the millennial respondents to report that they max out their employer-sponsored plan contributions (18% vs. 22%),

Moreover, the survey showed that younger workers are less likely than older workers to place importance on getting financial advice on retirement planning: just 24% of Gen Xer and millennial respondents said they believe that consulting a skilled financial advisor is crucial to achieving a comfortable retirement, compared to 30% of the baby boomers surveyed.

The survey also uncovered significant gender differences in retirement planning patterns. For example, more of the female than the male pre-retiree respondents indicated that they understand that sticking to a comprehensive financial plan (62% vs. 47%, respectively) and leveraging a skilled financial advisor (28% and 24%, respectively) are critical to securing a comfortable retirement. The results also showed, however, that 40% of the female respondents, compared to 33% of the male respondents, admitted that they have no retirement savings; and that 71% of female respondents, compared to 56% of male respondents, acknowledged that they do not know their net worth.

The findings suggested that the gender gap in retirement savings may be partially attributable to women being less likely than men to have access to a range of retirement savings options, as 27% of the employed women surveyed, compared to 19% of their male counterparts, reported that they are not offered an employer-sponsored retirement plan. But the survey results also showed that when women have access to these benefits, they often fail to take full advantage of them: the female respondents were found to be less likely than their male counterparts to contribute to a retirement plan offered by their employer (58% vs. 67%) or to max out contributions to their employer-sponsored retirement plan (16% vs. 26%).

From Benefit Trends Newsletter, Volume 61, Issue 8

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.

Millennial Workers Benefit from Automatic Features in Retirement Plans

Millennial Workers Benefit from Automatic Features in Retirement Plans

Millennials are the first generation of workers to fully benefit from improvements made to retirement plans over the last decade, including the introduction of automatic features, and these improvements are reflected in their retirement savings habits and attitudes, the results of a survey conducted by retirement benefits consultancy Empower Institute indicate.

The survey of 4,038 working adults aged 18 to 65 was conducted between December 18, 2017, and January 21, 2018. Researchers observed that the landmark Pension Protection Act of 2006 (PPA), which was enacted at a time when the millennials were first entering the workforce, recognized the importance of employer contributions to employee accounts, and reformed workplace retirement plans in a number of ways.

Most significantly, researchers noted, the PPA allowed retirement plan sponsors to implement automatic enrollment of plan participants and automatic escalation of participants’ contributions. The survey found that 41% of millennial respondents are automatically enrolled in a defined contribution plan, compared to 38% of Gen Xer and 33% of baby boomer respondents; and that 38% of millennial respondents are enrolled in a plan with auto-escalation features.

The survey results included a retirement progress score (RPS), or a numeric estimation of the percentage of working income that U.S. households are on track to replace in retirement. The findings showed that the median projected income replacement among all the survey participants is 64%. Broken down by generation, the findings indicated that respondents of the millennial generation (born after 1981) are on track to replace 75% of their income in retirement, compared to 61% for Generation X and 58% for baby boomer respondents. Researchers also observed that there is an 11-point difference in median income replacement percentages among participants across all generations who were enrolled automatically in a defined contribution plan and those who opted into a plan.

In addition, the survey results suggested that attitudes about retirement planning differ across the generations, with millennial workers expressing less certainty than their older counterparts that Social Security will provide them with retirement income in the future. When asked to identify the sources they expect will provide them with income during retirement, 59% of millennial respondents cited Social Security, compared to 88% of boomer and 73% of Gen X respondents. By contrast, 61% of the millennials surveyed, compared to 55% of the Gen Xers and 47% of the boomers, said they see defined contribution plans as a likely source of income in retirement. Moreover, 48% of the baby boomers surveyed said they believe they will need to work at least part-time in retirement, compared to 44% of the Gen Xers and 40% of the millennials.

The findings further indicated that while millennial respondents currently have smaller amounts of investable assets than Gen Xers and baby boomers, who have been in the workforce longer, these younger workers are more likely than their older counterparts to have a financial advisor and a formal retirement plan: 24% of millennial respondents reported having a formal retirement plan, compared to 19% of Gen X and 17% of baby boomer respondents. The overall retirement progress scores of respondents were also found to vary depending on whether they reported receiving paid advice: those with a paid advisor had a median retirement progress score of 91%, while those without a paid advisor had a median RPS of only 58%.

From Benefit Trends Newsletter, Volume 61, Issue 8

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.

Divorce Can Have a Substantial Impact on Retirement Security

Divorce Can Have a Substantial Impact on Retirement Security

Getting divorced has large negative effects on the retirement readiness of American households, but divorced women are generally no worse off than single women who have never married, a study published by the Center for Retirement Research at Boston College concluded.

The research brief, “How Does Divorce Affect Retirement Security?” by Alicia Munnell, Wenliang Hou, and Geoffrey T. Sanzenbacher, was published in June 2018. The authors investigated how divorce impacts the National Retirement Risk Index (NRRI), which is calculated by comparing households’ projected replacement rates—or retirement income as a percentage of pre-retirement income—with target replacement rates that would allow them to maintain their standard of living in retirement. These calculations are based on the Federal Reserve’s triennial Survey of Consumer Finances (SCF), which uses a nationally representative sample of U.S. households.

The authors observed that although the divorce rate is no longer rising, about 40% of marriages in the U.S. will end in divorce. The brief outlined the main types of financial setbacks couples typically experience when they divorce, including having to cover legal fees and other short-term expenses associated with the breakup; being forced to sell the family home, sometimes at a suboptimal time in the housing market; having to divide financial and retirement wealth between two new households, which may force the spouses to sell assets prematurely; and having to take on the cost of maintaining two households instead of one, which can increase living expenses and, in some cases, income taxes. The authors also noted that divorced women in particular may find it difficult to work and to save for retirement because they have child care responsibilities, while divorced men who are non-custodial parents may face problems saving because they have to cover child support and alimony payments.

Based on the assumption that these financial losses almost certainly inhibit each spouse’s ability to save for retirement, the study looked at the questions of how severely divorce affects retirement readiness, and how these effects vary by household type. Not surprisingly, the results showed that both wealth and earnings are lower for households with a previous divorce than for those with no history of divorce: the average net financial wealth of non-divorced households was found to be $132,000, or about 30% higher than the $101,000 held by divorced households.

The findings also indicated that this less favorable economic profile carries over to the NRRI, as 53% of households who have gone through a divorce were found to be at risk in retirement, compared to 48% of households with no history of divorce. After controlling for other factors like income group and age, the analysis showed that the share at risk is 7.3 percentage points higher for the divorced households than for the households with no previous divorce. To put this figure into perspective, researchers pointed out that the Great Recession increased the NRRI by nine percentage points, which suggests that the impact of divorce is large.

However, the analysis also found that not all household types are equally affected. The results revealed that compared to their non-divorced counterparts, married couples with a previously divorced spouse are 9.4% more likely to be at risk in retirement and divorced single men are 5.5% more likely to be at risk in retirement, but that divorced single women are not disadvantaged relative to non-divorced single women. To explain this lack of a difference in retirement readiness between divorced and single women, the authors observed that although divorced women are more likely than single women to have children, which can reduce their ability to save for retirement, they are also more likely to own a home.

From Benefit Trends Newsletter, Volume 61, Issue 7

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.