Limit spending, work longer, maximize contributions, buy annuities, delay claiming Social Security, buy long-term care insurance, increase equity allocations, or relocate to cheaper housing. These are just some of the messages that retirement savers are bombarded with about how to personally manage longevity risk.
Yet, amid longer life expectancies, inflation and high healthcare costs, the evolving national retirement landscape is more than an “abstract concept” for retirees and near-retirees worried about the reality of their own retirement, according to the latest Cerulli Edge—U.S. Retirement Edition, 2Q 2023 Issue.
And while today’s workers are aided by a proliferation of retirement income products coming to market, retirement savers and retirees remain concerned about longevity risk. In fact, the top retirement fear among Americans across all generations is outliving their retirement savings (58%), the firm’s research shows. Not surprisingly, the percentage is even higher for near-retiree and retiree generations (Gen X and Baby Boomers).
At the same time, more than half of U.S. retirees (54%) rely on Social Security as their primary source of income, even though across the world, government retirement programs are being weakened by longer life expectancies. Of this share, 20% have no secondary source of retirement income. If action is not taken by legislators, the main Social Security trust fund would pay only 77% of its scheduled benefits by 2033.
Save Sooner or Work Longer?
Against this backdrop, Americans are seeking certainty regarding their retirement savings. Many active workers who will not have saved enough for a full retirement have lost trust in both the government and their employers to take care of them and now plan to continue working through retirement.
According to the research, almost half (46%) of retirees who retired later than expected cite the need for income or savings to meet basic expenses as a reason for delaying retirement. Others kept working to fulfill enjoyment and engagement.
Still, spending less or working longer often are not ideal, or even sufficient, solutions, Cerulli notes. Moreover, when considering retirement age in the context of “work-span” and “health-span,” working longer typically is plausible only for so-called, white-collared workers, while workers in physically demanding jobs simply cannot work longer.
Interestingly, the report points to the “French pension riots” as an example of bringing the “fragility” of the American retirement system and the concerns of low- and middle-income retirees into focus. “President Macron’s decision to raise France’s retirement age from 62 to 64 should raise an important question for retirement product providers: When government programs fail to deliver, is the retirement industry poised to help the many Americans who do not/will not have enough saved to last their retirement?” the report asks.
Legislation, including the recently enacted SECURE 2.0 Act and the original SECURE Act, was passed in part to address this dilemma. Provisions including auto-enrollment and auto escalation, as well as higher catch-up contribution limits for those ages 60-63, will help nudge the individual saver and near-retiree to address longevity risk early. Plan participants, however, are still in need of additional guidance as they prepare for retirement, the report suggests.
“Despite efforts toward workplace financial wellness, retirement savers are at a financial education deficit,” observes Elizabeth Chiffer, associate analyst at Cerulli. “Solutions to address longevity risk in the defined contribution space include retirement income products that too often are sold as one-size-fits-all solutions rather than presented as an array of options that should be matched to the needs of an individual retiree. Uncertainty and confusion must be met with education, and ‘personalization’ must transform from jargon into action,” Chiffer notes.
To that end, plan sponsors, recordkeepers and financial wellness firms should continue to enhance these benefits by personalizing offerings to what plan participants find most useful, the report notes. Moreover, by reassuring and protecting the privacy of personal data, targeted communication can help to engage workers who otherwise might be reluctant to take advantage of these benefits, the report further emphasizes.
