Despite all the warnings about the coming retirement crisis in America, current retirees seemed to be doing quite well in terms of financial assets and expenses. But the secret to their success — heavy reliance on traditional pensions — suggests that retiring boomers will need more help from financial advisers to achieve a similar level of retirement security.
Pensions provided at least half of total income for the more than 40% of retirees who participated in an online survey conducted for the Insured Retirement Institute (IRI) last summer. In contrast, only 24% of private industry workers are covered by a defined benefit plan today.
The IRI survey included more than 800 Americans between the ages of 65 and 80. Most had annual household incomes in excess of $50,000. All participants had investible assets of at least $50,000 and about half of them had investible assets between $100,000 and $500,000.
The vast majority of these retirees characterized their financial condition as good or better than they expected it would be when they retired, according to the IRI's inaugural study titled “It's All About Income.” More than 70% of the participants said they are not concerned about exhausting their financial resources in retirement.
After pensions, Social Security provided at least half of the income for about 15% of retirees in the IRI survey. Employment and systematic withdrawals from savings represented only a minor source of income for most. In fact, more than half of retirees in the survey said the primary reason they had withdrawn money from retirement accounts was to satisfy required minimum distribution rules rather than immediate spending needs.
(More: Baby boomers reach required minimum distribution milestone for retirement accounts)
“The significance of pension for this group cannot be overstated,” the report said. “Without them, retirees would have a lower standard of living and/or be far less confident in their ability to sustain their savings in retirement.”
To replicate $25,000 of annual pension income typical of many of the current retirees in the IRI survey, a newly retired married couple today would need to invest about $485,000 in a life-only annuity.
To put that in perspective, it would have been impossible for most of the current retirees in the IRI survey to purchase an annuity of that size because few had accumulated sufficient savings to do so. Without their pensions, many current retirees would have had significantly lower income in retirement or would have had to increase the withdrawals from their savings, increasing their risk of running out of money in later years.
On the spending side, the IRI report found that more than a third of current retirees said they spend more money on travel and leisure than they had expected. But with incomes bolstered by pensions, many of them are likely to be able to absorb costs for discretionary items without tapping into their savings.
Insurance, taxes and medical expenses are another matter. When millions of boomers — 56 million without pensions, according to IRI estimates — enter retirement, they can stay home if their budgets don't accommodate trips or vacations. But they'll still have to pay for taxes and insurance and will likely incur medical expenses and other emergencies. And for the estimated 34 million boomers with no retirement savings, continued employment or relying solely on Social Security may be their only options.
(More: Financial advisers need to prepare for the coming age wave)
A separate study in the Journal of Financial Planning revealed a similar reluctance by current retirees to tap their savings and offered suggestions on how advisers can help future retirees.
“Retirees may view annuitized income from Social Security and employer pensions as their primary source of retirement spending and think of the retirement portfolio as a reserve to protect again the unexpected,” professors Chris Browning, Michael S. Finke and Ph.D. candidate Yuanshan Cheng of Texas Tech University and professor Tao Guo of William Patterson University wrote in their article, “
Spending in Retirement: Determining the Consumption Gap.”
The authors recommended that financial planners rethink how they discuss risk and reward when creating a retirement income plan for their clients. Advisers should focus less on asset management and pay more attention to income management, they wrote.
“After retirement, the reward of efficient market returns from the effective management of market risk that was dominant during accumulation may be less important than stable, reliable income from the effective management of risk related to uncertain lifespans and medical costs,” the team wrote. “Setting aside cash reserves and using annuity products — actions contradictory to the traditional practice of portfolio management — may increase retirees' willingness to spend by increasing the certainty of future income and ensuring resource availability for end of life expenses.”
(More: The Longevity Paradox: As Americans live longer, they run the risk of outliving their money )
Financial advisers can help baby boomers and gen Xers enjoy the same confidence and security as many of today's retirees by helping them create their own pensions through Social Security optimization and the use of guaranteed lifetime income products where appropriate, the IRI report concluded.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews
and a certified financial planner.
