The 40-year retirement strategy
Are you ready to live to l00? Longevity is on the rise, thanks to improvements that have been made in health care and lifestyle, and it’s an exciting development.
According to the Human Mortality Database, children born today in the developed world have over a 50 percent chance of living past the age of 100. And according to the Social Security Administration, 1 out of every 4 65-year-old Americans can expect to live past age 90.
There's a growing awareness of the importance of the balance between physical, mental and financial health. However, declining pensions and the uncertainty of Social Security have put many Americans’ retirements and their financial wellness on shaky ground. Retirement strategies that can financially handle the challenges of longevity – like 40-year retirements – are critical to Americans’ long-term wellbeing.
SECURE and RESA
That’s why legislation such as the Setting Every Community Up For Retirement Enhancement (SECURE) Act, which was approved this month by the House Ways and Means Committee, and the Retirement Enhancement and Savings Act (RESA), which has been introduced in the Senate, must be prioritized by Congress. They are important steps toward empowering Americans to understand and address the financial implications of their longevity.
Despite the optimism of longer life expectancy, more than half of Americans aren’t sure their current retirement savings plan will provide for a 100-year lifespan, according to new research from AIG. And, alarmingly, 59 percent of Americans fear running out of money more than death.
This fear is not misplaced. A new report from the Government Accountability Office found that of Americans nearing retirement, 29 percent have no retirement savings – neither a defined benefit plan like a pension nor a defined contribution plan like a 401(k).
At the same time, there’s been a decline in traditional pension plans in recent decades. Only 5 percent of Fortune 500 employers now offer defined pension plans to new hires, and Social Security payments at best replace just 40 percent of the average American’s income in retirement.
Today, 62 percent of U.S. households lack protected lifetime income in the form of an annuity or pension, according to the Alliance for Lifetime Income. In the past several decades, workers have been encouraged to amass a pool of savings for retirement through plans like 401(k)s and IRAs. Savings are a crucial component of any retirement strategy, but savings alone may not be enough for most people to bridge the income gap between their needs and resources in retirement.
Can’t be tackled alone
We need solutions for what is a looming retirement crisis that has significant implications for our country. It is a challenge that can’t be tackled alone. Individuals, employers, financial institutions, advisors and legislators all have a part to play in helping Americans achieve retirement security.
If enacted in law, the bipartisan SECURE Act and the similar RESA will go a long way toward improving how Americans plan for retirements that could last up to 40 years or longer – and could help avert the retirement crisis facing generations of American workers, from millennials to baby boomers.
By clarifying the safe-harbor rules for selecting an annuity provider and ensuring the portability for employees, the SECURE Act will encourage more employers to offer annuity options in their retirement plans, giving people more choices to prepare for a secure retirement. Additionally, it will require employer-sponsored retirement plans to provide participants with an annual statement showing how their lump-sum savings translate into an estimated lifetime stream of monthly income from an annuity – making 75 percent of workers more likely to increase their savings level.
The legislation also contains important provisions that will incentivize and make it easier for small businesses to offer 401(k) plans. These provisions are sorely needed –a 2017 survey from the Pew Charitable Trusts found that only 53 percent of small and mid-sized businesses offered a retirement plan. Long-term, part-time workers – many of whom work at these small businesses – will also be able to participate in 401(k) plans.
Additionally, the SECURE Act will provide more time for individuals to build retirement savings by eliminating the age cutoff for IRA contributions and increasing to 72 the age for beginning mandatory distributions from retirement accounts.
Even people who have managed to save a lot for retirement aren’t always sure how to convert those assets into reliable income that will last their lifetime. According to AIG’s research, only 9 percent are “extremely confident” that they will have enough income to last through their retirement.
Having an annuity as part of one’s portfolio helps protect retirees even if they run out of savings due to longer life expectancies. Economists have long championed protected lifetime income as the best means for doing that.
But, right now, most Americans are not able to contribute to an annuity over time through their 401(k)s. By making this possible, this new legislation will help bridge the lifetime income gap left by pensions and Social Security.
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Changing the retirement mindset from one that prioritizes savings, to one that emphasizes savings and income for life, will take not only effective legislation but a collaborative industry effort. By arming future retirees with new strategies around financially planning for longevity, we can ensure that Americans are entering the best years of their lives with confidence.
Kevin Hogan is the chief executive officer of AIG Life & Retirement.