ISELIN, NJ, June 6, 2011 – Living longer than expected is one of the most serious issues facing U.S. workers today, according to a new issue brief by the Institutional Retirement Income Council (IRIC), a non-profit think tank for the institutional retirement industry. IRIC also says longevity and its impact on retirement savings are creating workplace challenges for employers as well as policy issues for the government as many workers will delay retirement in order to accumulate sufficient retirement savings.
“In today’s 401(k) environment, when most employees retiree, they receive lump sum distributions, roll those over to an IRA, and then have to stretch that money out over the rest of their lives,” said Fred Reish, an IRIC member and a partner at Drinker Biddle & Reath LLP, who co-authored the issue brief. “Unfortunately, most people do not know the probabilities for how long they will live and under-estimate the time. As a result, they also under-estimate how long their retirement funds need to last, the lump sum amount they need and the rate they can safely use to withdraw funds from their retirement accounts.”
The issue brief, “The Problem with Living Too Long,” focuses on longevity, one of the major factors retirees must consider when turning their 401(k) account balances into a stream of monthly payments during retirement. The issue brief notes that today’s workers need to understand that they should expect to live a long time after they retire. And while no one knows the answer to how long will they live during retirement, the issue brief provides an in-depth analysis of life expectancies in retirement with tables and examples including:
• Percentages of men, women and married couples expected to live to a certain age.
• The impact that delaying retirement will have on the time period needed to build a comfortable retirement nest egg.
The issue brief also discusses various retirement income options such as annuities, IRAs, and guaranteed minimum withdrawal benefits (GMWBs), that can be used to address the longevity conundrum. Retirees, on one hand, can use their 401(k) account balance to purchase an annuity. While purchasing an annuity provides a worker with certainty and addresses the longevity factor, it also leaves the retiree facing a potential diminished lifestyle in the event of inflation. On the other hand, retirees can hold their retirement assets in an IRA, invest funds appropriately, and use a withdrawal rate intended to sustain money for lifetime. This option also presents challenges for retirees, if, for example, they live longer, run out of funds and end up with a less than desired living standard toward the end of their life.
“People are living longer. And while most of us consider this a good thing, it also makes it much more difficult for workers to save enough money to generate sufficient income in retirement,” said Reish. “Plan sponsors and participants need to better understand longevity and the impact on retirement savings. We believe that one likely outcome is that many workers will retire at later ages, which will have implications for employers and also policy makers. We also believe that now is the time for the insurance and investment communities to create additional retirement income products for 401(k) participants and retirees that guarantee, or at least virtually assure, that income will last for a lifetime.”
To obtain a copy of the issue brief, “The Problem with Living Too Long,” please visit http://iricouncil.org/thought
About Institutional Retirement Income Council
The Institutional Retirement Income Council (IRIC) is a non-profit, membership-based organization of industry advisors who are dedicated to sharing best practices, informing about legislative and regulatory issues, and facilitating solutions for plan sponsors and their participants. IRIC’s mission is to facilitate the culture shift of defined contribution plans from supplemental savings programs to programs that provide retirement security. By providing a forum for insightful, solutions-oriented thought leadership on institutional retirement income, the IRIC is promoting the need for retirement income adequacy for defined contribution plan participants.