Inside America’s retirement income crisis

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Americans close to retirement or recently retired are still not prepared, according to a new survey, "Americans Change Retirement Savings Strategies," from the Alliance for Lifetime Income (ALI), a nonprofit consumer organization that educates Americans on how to protect their retirement.

"There has been a seismic shift in retirement security from a time when many people could rely on a pension in retirement," said Jason Fichtner, a senior fellow and head of the Retirement Income Institute and chief economist at the Bipartisan Policy Center, both based in Washington, D.C. "Today, many Americans are facing a retirement crisis because they are at risk of running out of money in their retirement."

"Today, many Americans are facing a retirement crisis because they are at risk of running out of money in their retirement."

- Jason Fichtner, head of the Retirement Income Institute, chief economist at Bipartisan Policy Center

He also said that this is the first retiring generation in which more than half don’t have a pension to cover part of their retirement costs.

"That makes this the first generation where the majority must rely on their own savings efforts to prepare for retirement," Fichtner told FOX Business.

There’s another issue at hand that is affecting the retirement crisis: "We’re about to hit ‘Peak 65’ next year, a historic demographic event when we’ll see the largest number of Americans reach 65 in history, and far too many people still don’t have the savings and protected income they need to retire comfortably," Fichtner said, reporting that roughly 10,000 people a day are turning 65 and that number will increase to 12,000 a day upon reaching the Peak 65 moment next year.

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The multipart 2023 Protected Retirement Income and Planning (PRIP) study, according to the ALI, is the only research of its kind that surveys both consumers and advisers simultaneously. The annual study examines the rapidly changing retirement income planning landscape, including shifts in consumer attitudes and behaviors toward retirement savings, a press statement said.

Americans Change Retirement Savings Strategies Highlights

• 51% of consumers between 45 and 75 feel they do not have enough retirement savings to last their lifetime.
• 32% are not confident they will have enough money in retirement to cover basic monthly expenses.
• 44% are retired currently or retired previously and have gone back to work.

Growing demand for protection and annuities

This survey also reveals how consumers want 80% of their retirement savings, which will cover their needs in retirement, to be invested in safer investments, and those protected by a pension and/or an annuity have a significantly more positive outlook on their retirement prospects, according to the survey results.

Also, consumer demand for annuities has skyrocketed to an all-time high amid concerns about unprecedented market volatility and falling retirement investments, according to ALI.

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What is an annuity?

In simple terms, Fichtner said an annuity can be structured like a personal pension you can purchase from an insurance company to turn a portion of your retirement savings into a predictable paycheck.

"Depending on the type of annuity, you purchase the contract (as an individual or married couple) in either a single payment or with multiple payments over time," he added.

According to Fichtner, there are many annuity types available today, each with different features, benefits and costs, but they basically fall into three main categories:

• Fixed: Protects your principal from market downturns and offers a fixed rate of interest for growth and guaranteed monthly payments.
• Fixed Index: Protects your principal from market downturns, offers a minimum crediting rate with potential for additional interest based on market indexes, and guaranteed monthly payments.
• Variable: Offers the potential to grow your money through various market investments, but with the potential for market loss, and the option of receiving guaranteed monthly income payments.

Annuities can be a valuable part of a diversified portfolio. Fichtner said annuities may be a good choice if:

• Social Security isn’t enough to cover your basic expenses.
• You expect to live a long time and could potentially outlive your savings.
• You want to reduce risk and protect part of your portfolio.

Why is diversification so vital in your portfolio?

Diversification is more important than ever, especially when you are building a comprehensive retirement portfolio, Fichtner said, pointing out the need to think about the types of accounts you own – taxable, tax deferred (IRA, 401k) – as well as the types of investments you own – stocks, bonds, mutual funds, ETFs and annuities.

"Annuities are becoming more and more popular since many people do not have pensions but still want protected retirement income," Fichtner tells FOX Business. "And making our savings last is a big deal given we are generally living longer than prior generations."

How does risk tolerance and time impact investment decisions regarding retirement savings?

Peter J. Landry, the director of insurance and annuities for Wells Fargo Wealth & Investment Management who is based in Charlotte, North Carolina, explains that a consumer’s risk tolerance is arguably the most important consideration of all with respect to retirement savings.

"It would be inappropriate, for example, for a risk-averse consumer to invest their retirement savings in a product solution that provides a great deal of exposure to market volatility," Landry told FOX Business. "Above all, peace of mind is what is most important and why it is vital to understand the amount of risk a consumer is willing to absorb."

That said, inflation, which has been historically high as of late, can erode the buying power of the retirement dollars that the consumer is putting aside, Landry said.

"Younger individuals will want to carefully consider at least having some market exposure so that they can grow their retirement savings over time and work to keep pace with inflation," he said. "Additionally, having time before needing assets allows for the time value of money, essentially compounding interest, to work to provide for growth of the investments being accumulated for retirement."