A recent study by the Center for Retirement Research at Boston College found that “many younger baby boomers and members of subsequent generations who don’t have access to a traditional pension could outlive the funds in their 401(k) accounts.” (1)
In the 1980s 401k plans began to replace pension plans in the workplace. Workers became responsible for accumulating their own retirement savings. Of workers born in 1947, 52% had pensions. By comparison workers born only 10 years later, only 21% had pensions.
The study compared retiree spending for people who had pensions and those who only had a 401k. They found that “retirees with pensions often didn’t spend their savings at all. In fact, many saw their nest eggs continue to grow after they stopped working.”
“Those who had a traditional pension, which guarantees a fixed payment each month until death, likely needed to turn to their savings less because of that reliable income.”
For those who only had 401k plans, people spent a larger share of what they have, drawing money from their 401(k).
“The fast drawdown of savings in 401(k) accounts means that many retirees depending on them may be at risk of exhausting their funds entirely by the age of 85, although around half of them will live beyond then, the study said.”
“A challenge with 401(k) savings plans is that they charge retirees with figuring out how much to withdraw each month. This calculation can be hard to hit right, and although those with sizeable savings aim to live off their money’s earnings, the market is unpredictable and has periods — such as right now —where it takes more than it gives.”
Another factor not mentioned in the article may be the role Required Minimum Distributions (RMDs) play in forcing retirees to withdraw money from their retirement accounts at an accelerated rate. At age 72 retirees must start making withdrawals from IRAs and 401ks.
An important of the finding of the study… “One of the advantages of the pension system was that it reassured you how much you could afford to spend, practically, in that it would never run out, and in the advice-sense, too, because it says, ‘Here, you can spend this much, because next month, you’ll get the same amount again,’” Gal Wettstein of CRR said. “A 401(k) doesn’t give you that.”
So how can workers and retirees who don’t have pensions address this risk?
What is the solution? Talk to a financial advisor about strategies that may help provide lifetime income. Some solutions act like a pension, once you start taking income, it will continue for as long as you live. It will help you meet your retirement income needs. People’s number one fear in most financial surveys is that they will outlive their savings, especially as longevity is increasing.
Utilizing tools that provide lifetime income for a portion of your portfolio might make a great deal of sense. To learn more please feel free to reach out to me. Email me at james.cox@glic.com
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James Cox
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Email: james.cox@glic.com
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