Posts Tagged "drawdown speed"
February 24, 2022
Retirees with Pensions Slower to Spend 401k
Retirees have long been reluctant to spend the money they’ve accumulated in their 401(k) savings plans. But it also used to be common for retirees to have a traditional pension to cover their regular expenses.
By the time the baby boomers came along, pensions were available to a dwindling minority of workers, and it isn’t entirely clear how much they’ll tap into their 401(k)s.
A new study quantifies the impact of this transformation in the U.S. retirement system, where traditional pensions are now found almost exclusively in the public sector. The conclusion, by the Center for Retirement Research, is that retired boomer households lacking a pension seem more likely to rapidly deplete the 401(k) savings they rely on, “leaving them with more risk that they will outlive their savings.”
Consider a simple example of the difference a pension makes. In the past, typical households that started retirement with a pension and $200,000 in 401(k)s and other financial assets had about $28,000 more at age 70 than their counterparts with $200,000 in assets but no pension. After age 75, the difference between the haves and have-nots widened to about $86,000.
For this analysis, the researchers used data on the retirement finances provided in a survey of older Americans, specifically the heads of households born between 1924 and 1953, which includes some of the earliest boomers.
The researchers also found that the pace at which these retirees spent their savings hinged on the percentage of wealth they held in the form of annuities, whether a pension, Social Security, or an insurance company annuity. The retirees who got more of their income from annuities depleted their savings more slowly.
Based on prior generations’ behavior, the researchers roughly estimated that boomers – given their lower pension coverage – are in danger of using up their financial assets at around age 85. This would leave them with little room in their budgets for a long life, a large unexpected medical bill, or an inheritance for their children.
Boomers probably shouldn’t assume then that their parents’ retirement experiences are a reliable indication of how they will fare.