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Near-Retirees Need Help Maximizing Retirement Income Sources

Retirement Income

The findings of a new survey suggest that plan sponsors and advisors should be proactive in providing education and advice, as most near-retirees indicate they are looking for help to maximize retirement benefits while minimizing taxes.

According to Allspring Global Investments’ 20th annual retirement survey, the topics of guaranteed income, savings targets, tax management and the complexity of Social Security and Medicare benefits are among the areas about which near-retirees could use some guidance. In fact, the survey found that 53% of near-retirees plan to use an advisor to maximize retirement income sources, but 39% of near-retirees have not yet done so. 

“As fewer participants retire with employer-sponsored defined benefit plans, concerns of the newly retired are more evident with each passing year,” explains Nate Miles, Head of Retirement at Allspring. “These concerns place more options and choices in the hands of participants. As a result, we’re seeing growing interest in better management of taxes and optimization of Social Security claiming strategies. Long term, that means near-retirees and new retirees are going to need—and will be looking for—help from their employers and advisors to optimize choices.”

Findings from this year’s survey reflect five retirement themes, discussed below.

Sources of income and financial stress. Even though pension benefits continue to decline and concerns about Social Security solvency rise, near-retirees appear to be adapting financially and psychologically to the changes. That said, the survey found that having a balance of both guaranteed and non-guaranteed retirement income sources is related to a more positive outlook on retirement, compared with mostly guaranteed retirement income sources.

Non-guaranteed income can result in higher investment returns, while relying on guaranteed income can be challenging in a high-inflation environment, the study notes. As such, having a variety of income sources may lead to a greater sense of security.

Yet, based on the survey responses, current retirees rely heavily on Social Security and pensions, while non-guaranteed sources make up only a small subset of retirees’ sources of income.

Retirees’ Source of Income
Guaranteed Non-guaranteed
Social Security 37% IRA 10%
Pension Plan 25% Taxable Brokerage Account 6%
Bank Account 9% DC Plan 4%
Annuity 4%  

Focus on setting and achieving a savings target. As one might expect, accumulating a certain level of savings is one of several variables in the retirement equation and individuals should be “laser-focused” on setting and achieving a specific savings target, the study notes. But a topic the industry seems to be increasingly hearing more about is the importance of looking ahead and planning for the decumulation phase.

Accordingly, drawing retirement income tax-efficiently should start with allocating where savings are held between taxable and non-taxable accounts during accumulation years, the study suggests. In fact, 71% of near-retirees are interested in learning how to minimize investment-related taxes.  

You either reach your savings target or you don’t. While a retirement savings plan can help keep workers on track, it represents several assumptions, Allspring further notes. “Some people will have more expenses in retirement while others will have fewer. Some will continue to work part time in retirement while others will stop working earlier than expected. Many will adjust their spending—by force or by choice.”  

Not surprisingly, each year of early retirement before age 65 significantly increases the chance of running out of money in retirement. Moreover, retiring three years earlier than expected significantly increases the chances by as much as 30% of not meeting retirement income needs. “That may sound tolerable looking at the broad population of retirees, but for some individuals, a retirement income shortfall could be catastrophic,” the study warns.

On the other hand, working part time in retirement—even 10 hours per week after age 65—can significantly reduce the risk of a retirement income shortfall—from 12% to 5%, according to Allspring’s research. Or it could allow for a higher standard of living in retirement.

Social Security and Medicare are complicated. Near-retirees who start this planning process early can enlist experts and maximize the benefits they receive through both programs. Putting it off or going it alone can lead to fewer options and suboptimal benefits overall, the study notes. To that end, the findings show that:

  • 47% of near-retirees are not sure they’ll get the Social Security benefits they’re entitled to; while
  • 50% rely on self-education to understand Social Security and Medicare.

Underserved segments have lower levels of retirement readiness. As the fifth retirement theme from the survey, Allspring found that the wealth gap still exists for most women, African Americans, and Hispanics, adding an extra hurdle for these individuals going into retirement. For instance, it found that:  

  • 69% of women retirees are confident their savings will last versus 87% of men; and
  • African Americans were affected more by the pandemic financially and expect to retire two years later, across income levels.

“The financial services industry needs to do better in serving these groups, including building diverse teams of investment professionals to support all communities, offering tailored guidance throughout their working years, and helping individuals optimize retirement benefits,” the firm emphasizes. 

“A key takeaway from our research is retirees are doing well but near-retirees are struggling and concerned,” observes Ron Cohen, Allspring's Head of Defined Contribution Investment Only Distribution. “This is an enormous opportunity for advisors and plan sponsors.”

The survey was conducted by Escalent on behalf of Allspring from Aug. 15–Sept. 7, 2022, among 2,758 adults who reside in the U.S. and are primary or joint household financial decision-makers. The sample consisted of 1,504 working Americans, with an average age of 60, and 1,254 retired Americans with an average age of 70.