More Americans will turn age 65 in 2024 than at any point in history, according to a new report published by the Alliance for Lifetime Income.
And many of them are unprepared for today’s retirement realities, according to the report, The Peak 65 Generation—Creating A New Retirement Security Framework.
According to Jason Fichtner, the author of the report and a senior lecturer at Johns Hopkins University's Paul H. Nitze School of Advanced International Studies, the fundamental problem is that the three-legged stool, which once served as a model for retirement income security -- pensions, Social Security, and personal savings -- is wobbly at best and near collapse at worst.
A steady low-interest-rate environment is also making it impossible for retirees to generate risk-free new income from their retirement savings that even keeps pace with inflation, Fichtner wrote.
And, though progress has been made, a large percentage of people are claiming Social Security benefits early and missing out on the full benefits they could receive if they delayed claiming for just a few more years, he noted in the report.
What’s more, the Covid-19 pandemic has caused economic insecurity to rise. An estimated 4 million workers prematurely retired, according to Fichtner's analysis.
In all, as many as 50% of households are at risk of not having enough money to maintain their standard of living in retirement, according to the report.
Given all that, Fichtner and the Alliance for Lifetime Income are calling for “a new retirement security framework that focuses on the need for sufficient protected income in retirement” and that framework will require policy changes by employers and the government, and help from financial advisers.
“We need to do a much better job focusing attention with the media, with policymakers on the need for better and more protected income in retirement,” Fichtner said in an interview.
So, what’s needed?
Access to Solutions
Broad access to efficient protected income solutions is required, Fichtner wrote. For instance, “the government could enact regulations to promote annuities and/or remove regulations that are barriers to annuitization.” One bit of good news on this front, according to Fichtner, is this: the SECURE Act provided a provision that made it easier for a retirement plan sponsor to offer an annuity option in a defined-contribution plan. And SECURE 2.0, should it become the law of the land, would potentially offer additional proposals to improve retirement security, Fichtner wrote.
A Bridge to Maximum Social Security
Fichtner is also calling for the use of something called a “bridge” annuity for individuals who retire before their Social Security full retirement age. Being able to purchase an annuity as a “bridge” between retiring and claiming Social Security would provide a source of protected income for a fixed number of years and allow the person to file for Social Security later, either at their full retirement age or at age 70 to maximize their monthly Social Security benefits, according to Fichtner. “Now you can use protected income through annuities and partial annuitization to offer bridge products to allow people to delay claiming,” he said during the interview.
Better Education and Disclosure Framing
Fichtner is also calling for better education and disclosure framing. To be fair, the SECURE Act does require employers to provide plan participants with an estimate of the lifetime income that their accumulated retirement savings will provide. And the Social Security statement does provide an estimate of the monthly benefit a person can expect to receive.
But policymakers, employers and other stakeholders shouldn’t be satisfied with a one-time change to disclosure practices. “Participant behavior should be closely monitored and integrated with new research-based framing practices to improve disclosure and education efficacy over time,” he wrote.
Protected Income in a Low-Rate Environment
Fichtner also wrote that employers, plan sponsors and the government should work together to develop public policies that aim to improve access and availability to as many options as possible that would help people save for and have an adequate financially secure retirement.
Some of those options might include, for instance, variable annuities, which could be a good option for those individuals who are undersaved because they would get the benefits of capital accumulation on a tax-deferred basis, Fichtner wrote.
Use “Trial Annuities” to Encourage Better Plan Participant Behavior
In the report, Fichtner also called for the use of a trial annuity. “Trial annuities would automatically use part of a new retiree’s saving to purchase a two-year annuity,” he wrote. “Trial annuities are designed to get workers ‘over the hump’ of being willing to try taking their retirement income in the form of an annuity without having to commit themselves ex-ante to a lifetime contract.”
One company that has launched such a product is TIAA.
Make Financial Advice a Workplace Benefit
Fichtner also wrote that employers should consider offering professional advice as a workplace benefit to their workers. “It is an important component of the new retirement security framework that employers take an active role in helping their workers save for events that occur during their working lives, as well as helping them to have a financially secure retirement,” he wrote.
Fichtner suggested financial professionals should advise clients on income planning, Social Security planning, and the need for adequate sources of protected income in retirement to maintain a desired standard of living.
They should also provide clients with more robust retirement income education and resources to encourage optimal Social Security claiming strategies to help maximize this critical source of protected income.
And lastly, they should consider incorporating annuities into clients' retirement portfolios as a uniquely efficient way for clients to generate protected income—especially in today's low-rate environment.