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Employer and government policy changes are needed to create a new retirement security framework that focuses on providing sufficient protected income in retirement, according to a new Alliance for Lifetime Income white paper, "The Peak 65 Generation: Creating a New Retirement Security Framework," by by Jason J. Fichtner, PhD,, senior lecturer in International Economics at Johns Hopkins University Nitze School of Advanced International Studies and a research fellow with the Alliance for Lifetime Income and the Retirement Income Institute.
What "three-legged stool" of retirement income?
In the past, retirees have relied upon a "three-legged stool" of retirement income made up of Social Security, pensions and accumulated savings. Today, more and more retirees rely on Social Security, as pensions have all but disappeared from the American workplace.
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The situation is unsustainable as pressures on both the Social Security system and Medicare could soon mean lower retirement benefits, increased medical costs and higher income taxes on younger workers to keep both programs funded, said the paper.
To make matters worse, a large number of people claim Social Security early, which prevents them from receiving the full benefit they would get if they delayed claiming for a few years, the paper said.
Around 4 million people retired prematurely last year alone due to COVID-19. And a persistent low-interest rate environment makes it difficult for retirees to generate income from accumulated savings at a rate that keeps up with inflation.
The "Peak 65″ generation
The situation is coming into sharp focus as the nation will soon have more 65 year olds than it ever has before, earning this generation the nickname "the Peak 65 generation."
By 2030, the entirety of the Baby Boomer generation will be 65 or older, meaning one-fifth of the population of the United States will have reached the traditional age for retirement, and there will only be 2.2 workers per beneficiary by 2040, compared with 2.8 workers per beneficiary today and 3.4 workers per beneficiary in 2000.
As pensions have waned, Americans have turned their focus to other forms of accumulation for retirement, such as target-date funds. However, the paper said a focus on decumulation is now necessary as Americans understand the need to save for retirement but are less versed in how to manage those saved assets in a way that protects their standard of living, said the paper.
The role of annuities
Both Social Security and employer-sponsored pension plans function as annuities, which meant in the past, a retiree could count on roughly 70 percent of his or her income coming through guaranteed channels for life. As such, some financial advisors are now recommending retirees commit about one-quarter of retirement assets to an annuity to make up for the loss of guaranteed pension income.
Employers may become a crucial piece of retirement security for the nation's aging population, by distributing protected income throughout retirement while avoiding the pitfalls that made pensions plans unsustainable, including high costs, underfunding and bankruptcy, said the paper.
A new retirement security framework would use annuities in concert with Social Security to enable households to protect their financial security in retirement by creating a personal pension plan.
There are several ways annuities could come into play to protect retirement income. Retirees could purchase a term annuity to bridge the gap between stopping work and claiming Social Security in order to increase lifetime Social Security benefits, suggested the paper.
Alternatively, retirees may consider purchasing a longevity annuity, which insures against the risk of outliving assets by paying out a stream of income beginning about 10 years after purchase.
Trial annuities, which automatically use part of a new retiree's savings to purchase a two-year annuity, can ease retirees into the concept of annuities without requiring them to make a lifetime commitment.
The growing role of employers
The government and employers should work together to enact regulations that promote annuities or remove regulations that are barriers to annuitization, said the paper. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 helps address this by making it easier for retirement plan sponsors to include annuity options in DC plans.
The paper also encourages employers and plan sponsors to craft better benefit statements that include estimates of lifetime income and to make professional advice a workplace benefit.
Employees are seeking professional financial advice on a wide variety of issues, including saving for emergencies, a home, education and even help with basic financial literacy and developing a monthly budget, said the paper. It is an important component of the new retirement security framework that employers take an active role in helping their workers save for events that occur during their working lives, as well as helping them to have a financially secure retirement, said the paper.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM's Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics.
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