Lifetime Income & Retirement Security
Americans planning for retirement today face more individual responsibility and risk for their retirement incomes than prior generations experienced, partly due to the decline of traditional defined benefit pension plans that paid monthly benefits. Now that the Baby Boomer generation has started to retire, many are discovering that they may have not taken sufficient steps to manage the challenges that come with replacing their former paychecks with adequate monthly income during retirement. Part of this challenge involves longevity risk—the risk of living beyond life expectancy—that adds more complexity to retirement planning because people face outliving the income provided by their assets.
Some retirees have taken lump-sum distributions from their 401(k) defined contribution accounts, individual retirement accounts (IRAs), and other retirement funds that they amassed over decades of work and may not have had access to adequate information about how to use those funds to create an income stream to pay their everyday living expenses in retirement. While adding money monthly to a 401(k) or IRA account during the working years might become routine for some, workers and retirees often face hurdles to obtain unbiased, easy-to-understand information about how to finance their retirement and where to find the right solutions to manage their lifetime incomes.
What can be done to lower these obstacles and better prepare current and future retirees to secure and manage their lifetime income needs?
Many approaches are needed to help future retirees secure lifetime income to provide them with the security and dignity of personally managing their retirement. These approaches include public-policy changes, changes within retirement plans, and broad-based public education efforts. These solutions require participation from all stakeholders: policymakers, actuaries, employers, financial planning advisers, and financial product and service providers.
Legislators should be raising the visibility of the challenges of securing income for life. Possible approaches include:
Altering Federal Retirement Policies
- Address Social Security’s long-term funding issues to ensure confidence in the program’s stability and assure retirees that they can plan accordingly.
- Increase the Social Security maximum age for delayed retirement credit beyond the current age 70 to allow additional flexibility in addressing longevity risk.
- Modify the age for required minimum distributions (RMD) in retirement plans beyond 70½ years to reflect increasing life expectancies, and implement proposed regulations that allow longevity annuities to satisfy RMD rules.
- Reduce insecurity about pensions by highlighting the value of life and health guaranty associations and the Pension Benefit Guaranty Corporation, and ensuring the programs remain sufficiently strong.
- Provide well-targeted tax incentives to encourage use of lifetime income solutions.