Which Retirement Risk Trumps Longevity, Leakage and LTC?

What’s a bigger risk to retirement security than longevity, leakage and long-term care costs?

A recent hearing held by the Bipartisan Policy Commission focused on those issues amid the broader topic of threats to retirement security.  

Jack Vanderhei, Research Director at the Employee Benefit Research Institute (EBRI), highlighted the impact of the three highlighted factors, using EBRI’s Retirement Security Projection Model. While all three had varying levels of impact, Vanderhei noted that once you control for relative level of income, one of the major threats to retirement security pre-retirement is whether an employee works for an employer offering a retirement plan.  

He noted that, looking at the second and third income quartile (the “middle 50%”) of Gen-Xers, the probability of not running short of money in retirement increases from 51% to 80% when you compare those with no future years of eligibility in a DC plan to those with 20+ years.

‘After’ Math

Once you have an accumulation in the DC system, the problem of leakages becomes important. Vanderhei explained that more than one in five of the middle 50% who are simulated to run short of money in retirement with leakages present would have sufficient funds if leakages were prevented — assuming that there was no change in participant behavior in response, such as individuals deciding to contribute less (or not at all) if they knew that they wouldn’t have access to those funds prior to retirement.

After attaining retirement age, longevity risk — the risk of outliving your resources — becomes a factor. Vanderhei noted that, while nearly two-thirds (62%) of the middle 50% are simulated to have sufficient retirement income, those in the longest relative longevity quartile only had a 33% chance. 

Vanderhei also shared previously unpublished results regarding the potential impact of a 25% QLAC (qualifying longevity annuity contract) on retirement readiness, though those hoping for a transformative impact would likely be disappointed. The biggest benefit — for those likely to live the longest (those in the longest relative longevity quartile) only saw an increase of 6.5% (for early Boomers) to 9.3% (for Gen-Xers). Slightly higher increases (6.6% to 9.6%) were projected for those in the longest longevity quartile and a positive 401(k) or IRA balance.  

Overall — that is, with no filter for longevity — the overall impact was actually negative on retirement readiness, due to the expense of these arrangements.

As for long-term care expenses, while this won’t be an issue for everyone, it can have an enormous impact on the retirement security of those who are affected. Vanderhei explained that only 17% of the middle 50% of those in the top LTC quartile will have sufficient retirement income.

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