“Are we there yet?” When is it time to retire?

The latest research from the Insured Retirement Institute (IRI) shows that Americans’ confidence in being able to retire is slipping. The IRI study, “Boomer Expectations for Retirement 2014”, indicates that those of the Boomer generation are losing faith in their preparedness for retirement. Three years ago, 37% thought they’d have enough money to live on comfortably in retirement; now, only 33% do. Confidence in their efforts to save has also dropped in the same period, from 44% to 35%. These findings are further supported by a recent Gallup poll that shows that “Not having enough money for retirement” is the top financial worry for Americans. In the poll taken between April 3-6, 2014, Gallup found that 59% of the respondents reported being “very worried” or “moderately worried” about their retirement savings. This topped the list of nine financial concerns.  This concern was even higher for those in the poll who are in the 50 to 64 age bracket, which encompasses the Baby Boomers. Of this group, retirement was the top worry for 68%.

Who says 65 is right?

So who decided 65 should be the normal retirement age anyway? According to the Social Security Administration (SSA), it was established in conjunction with the Social Security Act of 1935. At that time, private and state pensions typically used 65 or 70 as the normal retirement age. The Railroad Retirement System, which was formed a year earlier in 1934, used 65 as its retirement age. Actuarial studies also concluded that, “. . . using age 65 produced a manageable system that could easily be made self-sustaining with only modest levels of payroll taxation.”

All things considered, age 65 seemed to be a reasonable choice. It’s also interesting to note that according to the “National Vital Statistics Report,” the average age expectancy of a 20 year-old male in the mid-1930s was about 66. Little wonder they thought the math would work! They seemed to have missed the mark, however, when it came to predicting how long future workers would live. By the year 2000, the average age expectancy of a 20 year-old male jumped to about 75, an increase of nine years. 2000 also marked the year when the SSA began to increase the normal retirement age for people born after 1937. For workers born in 1960 or later, their normal retirement age is actually 67, not 65. In addition, Social Security offers certain additional benefit credits if retirement is delayed to age 70.

Live long and … prosper?

So what are the Baby Boomers doing to mitigate what is commonly referred to as “longevity risk” – the risk of living longer than expected and not being able to afford it? Some are trying to save more near the end of their careers, especially when they’re finished paying for college for their children. Unfortunately, this may not leave enough time to make up for the lost years of inadequate savings. As a result, many are adjusting their time horizons. (Note to Gen Y readers: google “power of compound interest”.) Some have decided to work longer, either in their current jobs or in encore careers, because they cannot afford to retire. IRI’s study shows that one-quarter of Baby Boomers surveyed expect to delay their retirement. The number who plan on retiring at 70 or more has gone up from 17% in 2011 to 28% this year. The “2013 Wells Fargo Middle Class Retirement Survey” reports that 34% of the respondents believe they will have to work until at least age 80 due to a lack of retirement savings. There is a “double benefit” to delaying retirement. Doing so not only provides another year of savings, it also reduces the need for another year of retirement income – more money, less time, This may be somewhat of a morbid concept, but it is reality and a somewhat effective solution to the problem.

Steady state

The other emerging trend in addressing longevity risk is the notion of lifetime income. This is not a new concept. In fact, this concept is the basis for the traditional defined benefit pension plan. Social Security is also built on the idea of receiving a known and guaranteed amount of income for the rest of one’s life. What’s new is applying the lifetime-income concept to a 401(k) or defined contribution plan account balance to create a steady and predictable stream of income throughout retirement.

The demand for such an approach is rising as Baby Boomers begin to retire. The market has responded by offering a number of systematic-withdrawal solutions that range from lifetime annuity insurance products to managed payout mutual funds. There is also the do-it-yourself “4% payout rule of thumb” approach and even an innovative approach that involves leaving money in the plan and having a set portion paid out every month – sort of like a retirement paycheck! After all, whoever thought it was a good idea to give plan participants a pile of cash at retirement and simply wish them good luck in managing it the rest of their lives?

While most Baby Boomers may look forward to living to 70, a good number may not look forward to working that long, but will be forced to do so. There may be a bit of a silver lining here. Once a person hits age 70, average life expectancy is about another 15 years! Let’s hope the Boomers plan accordingly.

Need more? Check out our Research and Insights web page, Retirement Readiness, for more resources to help employees plan for a secure retirement.

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