“Lifetime income is becoming the most important issue for retirement security,” says Theodore Goldman, Senior Pension Fellow at the American Academy of Actuaries, adding that the academy considers lifetime income “one of the most critical components leading to retirement security.”
Goldman shared his perspective on the importance of lifetime income options at an April 10 session of the Enrolled Actuaries Meeting held in Washington, DC by the Conference of Consulting Actuaries and the American Academy of Actuaries.
Joining Goldman on the dais in the session “Making Retirement Assets Last a Lifetime — the Next Big Actuarial Challenge” was Steve Vernon, Consulting Research Scholar at the Stanford Center on Longevity.
So what can be done to help participants’ assets last so as to enhance their retirement security? Vernon offered some insights on key considerations regarding how to help make retirement assets cover participants’ lifetime.
Helping ensure retirement income lasts also entails retirement planning, Vernon suggested. Considerations related to retirement planning that will be especially helpful, he said, include:
- amount of income;
- accessible wealth;
- bequests; and
- risks (for instance, inflation and death).
In addition, Vernon said, the Society of Actuaries and Stanford found in a 2017 study that integrating retirement plans, IRAs and home equity can be helpful in optimizing retirement income.
And there are levers available to help older workers with low account balances to bolster their financial security in retirement, Vernon said, although they can be difficult and subject to variables that can inhibit their effectiveness. These include:
- work longer;
- save more;
- spend less;
- stay healthy; and
- make every dollar count.
Vernon also argued in favor of using what he called a “spend safely strategy.” This entails optimizing Social Security as retirement paychecks, and optimizing required minimum distributions (RMDs).
How drawing from retirement funds is done is a key factor in the adequacy of retirement funds as time passes. Vernon suggested that an answer to the challenges this poses is to apply concepts from modern portfolio theory.
But more provocative, perhaps, was Vernon’s argument concerning the importance of adjusting not only spending, but also expectations. The big challenge, he said, is how to adjust people’s expectations regarding their retirement income and lifestyle during retirement.
As distasteful as that concept may be to impart, Vernon offered a ray of hope for those who have to deliver it — he said that there are “a lot of people” who are willing to have somewhat lower income in order to have greater access to their money.
Social Security remains a mainstay of financial security in retirement for many, Vernon contended. He cited research that found that Social Security will deliver a large percentage of retirement income for most middle income retirees. “No other retirement income generator has the advantages Social Security offers. Social Security protests against investment risks,” he said. He advocated optimizing Social Security before purchasing annuities or investing in fixed income options. Further, he said that Social Security may comprise what most middle income retirees need.
Still, Vernon did argue that there can be advantages to a delay in claiming Social Security benefits — and that doing so can increase retirees’ income replacement ratio as they spend during retirement.
What Employers and Plans Can Do
There are steps by which an employer and a plan can help the longevity of funds and participants to remain concurrent, Vernon noted. He acknowledged that many employers want to “wash their hands” and provide retiring employees with lump sums payments. But he said that there are low-cost ways employers can help older employees without administrative complexity.
Vernon suggested that employers can offer:
- automated RMDs;
- period-certain payouts to facilitate delay in claiming Social Security benefits;
- RMDs and qualified default investment alternatives (QDIAs) as default payment options;
- low-cost index funds;
- education, tools and retirement income statements;
- access to qualified, unbiased retirement plan assistance; and
- alternative career paths for older workers by which they can reduce their hours and consider part-time work.
More is in play regarding retirement security and having adequate finances than math and figures, Vance argued — words and terminology figure heavily as well in creating a different mindset concerning when retirement commences.
Vernon took issue with the way the terms “early,” “normal” and “late” are used regarding when people retire and start taking benefits. He argued that the way they are used actually carries a connotation opposite what they should.
For instance, Vernon suggested, it could be more beneficial for retirement savings balances to call retiring before the “normal” age “reduced” retirement rather than “early,” since “early” carries a positive connotation but retiring before the normal age for it actually reduces retirement balances and savings. Similarly, Vernon suggested that instead of calling retiring after the normal age “late,” which carries a negative connotation, it would be better to call it “increased” retirement, since continuing to work beyond the normal age enhances retirement savings balances.