With more older Americans delaying retirement to work longer and cutbacks looming in federal social insurance programs, many wonder what retirement will hold.
The Employee Benefit Research Institute recently convened a panel of experts to discuss key retirement issues facing the nation, including whether financially feasible retirement ages can be kept within acceptable ranges, and the implications of baby boomers and Generation Xers working past age 65.
Jack VanDerhei, EBRI research director, presented the organization’s findings at its 68th annual forum about the impact of deferring retirement age past 65 on retirement income adequacy. The results show that if baby boomers and Generation Xers delay retirement past age 65, many of them still would not have adequate income to cover their basic retirement expenses and uninsured health care costs —especially low-income workers.
“Will deferring retirement age work? The answer is, obviously, it depends,” VanDerhei said. “It depends on what probability of success you're looking for, where you were relative to everybody else in terms of pre-retirement income, and it certainly depends on whether you still are accruing benefits in a 401(k) plan.” Even if workers delay their retirement age into their 70s, there is still a chance households will be “at risk” of running short of money in retirement.
To lessen that risk, employers may want to rethink retirement plan design, particularly around default contribution rates when auto-enrolling employees. Many automatically enrolled 401(k) participants appear to be staying at the typical 3% default contribution rate, even though employers typically recommend they contribute at least 10% in order to achieve retirement income adequacy.
“There’s a real disconnect there between how people are being defaulted into the plan and where plan sponsors actually think they should be,” said Lori Lucas, executive vice president at Callan Associates.
She added that a major threat to retirement income adequacy from “leakage” of retirement assets is from cash-outs, where workers leaving a job take out all their retirement savings in cash rather than rolling over the assets into another tax-favored account — a problem that one nonprofit is trying to engage employers in solving.
Other speakers at the forum suggested that retirement plan sponsors should provide workers with more help in investing, since many workers will not be able to save more money or retire later, and that workers could improve their financial security by better asset management — in particular by cutting debt and using guaranteed income products to manage longevity risk.
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