Thirty-eight percent of middle-income Baby Boomers—those with a household income between $30,000 and $100,000 and less than $1 million in investable assets—expect Social Security will be their primary source of income in retirement, up from 30% before the financial crisis of 2008, according to a study by the Bankers Life Center for a Secure Retirement.
In lockstep with this, 43% of middle-income Boomers planned on primarily relying on personal savings in retirement, prior to the recession. Today, that is only 34%, according to the study, “10 Years After the Crisis: Middle-Income Boomers Rebounding But Not Recovered.”
A scant 2% of middle-income Boomers think the economy has fully recovered, and 65% say they haven’t felt any personal benefit from a bounce back. Of this group, 52% say their savings are lower than they were before the recession, and 40% say they are not earning as much. Sixty-eight percent are worried they will be hit with yet another financial crisis in their lifetime.
Prior to the financial crisis, 45% expected to retire debt-free, and today, that is only 34%. Previously, 23% expected they would be able to leave an inheritance to their heirs, but today, that is only 16%. Nonetheless, 92% of Boomers still plan to retire. However, 48% plan to work either full-time or part-time in retirement—up from 35% before the crisis.
Perhaps one of the reasons their savings are lower is that the recession has prompted 74% of Boomers to change their investment choices, with 28% moving into conservative funds.
These Boomers’ dismal outlook is grounded in fact, according to Bankers Life. Between 2007 and 2010, the inflation-adjusted median household income in the U.S. fell nearly 7%—and more strikingly, the median net worth of middle-income households fell 39% and homeowners lost an average of 55% of the value of their home.
“Social Security was designed to be a safety net, not a primary replacement for savings or income,” says Scott Goldberg, president of Bankers Life. “Those who are in or near retirement should consider the various ways they can create future income to help achieve a secure retirement. There are products readily available in the marketplace that can help.”
The Internet-based survey was conducted among 1,000 middle-income Boomers between the ages of 52 and 70. The full report can be downloaded here
Better Lump Sum Info Boosts Plan Participant Outcomes
Among DB plan participants who were given a choice between a lump sum or an annuity, fewer than half said that, at the time they made their decision, they recall being presented with information comparing the total amount of the lump sum versus the total value of the annuity payments.
A new survey analysis conducted by Harris Poll on behalf of MetLife
explores consumers’ attitudes and decisionmaking with regard to lump sums and
income annuity payments.
According to the “Paycheck or Pot of Gold Study,” of the
individuals who took a lump sum from a retirement plan, 63% made “major
purchases” within the first year. Nearly a quarter (22%) gifted a significant
portion of this money to an individual or a charitable group. A striking 21% of all participants who selected a lump sum at some point say they depleted it—taking just five and a half years on average to spend the dough; at the same time one in three with lump-sum cash remaining (35%) are concerned about the money running out while it is still needed.
Researchers warn that many in this camp quickly regret their choices
about lump sums: “Roughly one-third (31%) of those with major spending regret
their spending in hindsight, and 23% who gave money away lament their
generosity. Some have even had to subsequently cut back on other spending for
fear of running out of money.”
MetLife found that lump sum recipients “appear to have more
financial concerns than annuitants.”
“Fifty-two percent of participants who chose a lump sum
concede that, if they had taken an annuity, their budget would be more
predictable, and 34% say it would be easier for them to pay for basic
necessities,” the survey finds. “In contrast, defined benefit (DB) and defined
contribution (DC) plan annuitants believe they are more financially secure
because of their annuity than their friends and neighbors who don’t have
guaranteed income from an annuity (58%), and a nearly equal percentage believe
they are more confident in their financial decisionmaking (56%).”
Like other analyses in this area, the MetLife research finds
lasting confusion around the basic concepts of annuitization and lump sum distributions among plan
participants. People generally struggle with weighing the relative tax implications
of each approach, for example, or how to run in-depth comparisons about how
lifespan and health considerations should inform thinking around purchasing
various types of annuities versus taking lump sums. The research broadly makes the argument that employers have an important role to play in helping their employees understand and face longevity risk.
NEXT: Participant
preferences for lump sums
The MetLife survey report outlines some interesting history
pertaining to the use of annuities versus lump sums.
“A separate development that overlapped to some degree with
the beginning of a decline in DB pension plans was a change in how the benefits
were paid to retirees or terminated vested workers and their beneficiaries,”
the report explains. “As an alternative to the monthly annuity benefit these
plans are required to offer … DB plans added lump sum distributions, often as a
means of encouraging early retirement initiatives that became popular in the
1990s. This proved both easy to communicate to, and popular with, employees.
Once added, qualified plan anti-cutback rules served to keep these new benefit
forms in place.”
Against this backdrop, the MetLife research finds employer’s
choices in communicating the relative values of annuitization and lump sum
distributions play a key role in how employees ultimately divvy up their money.
Broadly speaking, defined benefit plan participants achieve nearly twice the
amount of annuitized income replacement compared with their DC counterparts, and this has a lot to do with their plan sponsors' willingness to discuss and confront increased longevity as a material workplace issue.
“The average lump sum amount for those who took a lump sum
from their DB plans was approximately $192,357 ($232,507 for men compared to
$144,793 for women),” MetLife finds. “One in five DB plan participants who took
a lump sum from their DB plans (22%) did so in conjunction with receiving
notice of a lump sum window. The average DC plan balance at retirement was
approximately $239,792 ($274,859 for men, compared to $188,178 for women). For
those receiving monthly annuity payments from their former employer’s DB plan,
the average monthly payment is about $2,661. The average monthly annuity
payment among those who receive annuity payments from their DC plans is about
$1,691.”
The report concludes that key information about longevity
and the risks of running out of money during a longer-than-expected retirement is
sorely lacking. Some limited information is available today, however, including
information focused on the tax treatment of both payment options—available to
39% of DB plan participants and 46% of DC plan participants.
“Among DB plan participants who were given a choice between
a lump sum or an annuity, fewer than half (45%) said that, at the time they
made their decision, they recall being presented with information comparing the
total amount of the lump sum versus the total value of the annuity payments,”
MetLife's analysis continues. “This indicates a potential opportunity to improve upon the
information provided to DB plan participants because, as the American Academy of
Actuaries has noted, when lump sum distributions are offered, it is critical
that participants receive information that is sufficiently clear and complete
to enable them to make informed decisions regarding whether to accept the lump
sum offer.”
NEXT: DC versus DB decisionmaking
The MetLife research shows DC plan participants who selected
an annuity were more likely than those who selected a lump sum to have been
provided with a paper statement illustrating how much income their DC plan
would provide in retirement (55% vs. 28%).
“Additionally, 39% of DC plan participants who chose an
annuity say they received a projection estimating how many years the money in
their DC plan would last, compared to 30% who chose a lump sum,” MetLife
reports. “For those individuals who had only a DC plan but no DB plan, only 6%
indicated that they conducted online research when making the decision of what
to do with the balance in their DC plan.”
Discussing the research effort with PLANSPONSOR, Roberta
Rafaloff, vice president, Institutional Income Annuities with MetLife,
suggested it was somewhat surprising to see that DC plan sponsors and their
recordkeepers frequently tout that online tools are made available to their plan
participants to project the income they may need in retirement. Many plan sponsors do not seem to grasp that simply making tools available to participants is not enough—something of a push or nudge is required for any such offering to take full effect.
“The low utilization rate of the do-it-yourself
approach is of concern,” she warns, “especially given that DC plans will
increasingly become the primary or, in many cases, sole source of retirement
income for many workers. This underscores the need for a more standardized approach
to conveying the value of retirement assets in income terms, such as
through lifetime income disclosures on DC plan benefit statements for
participants.”
Rafaloff observes that an individual’s risk tolerance
appears to impact whether they select a lump sum or annuity, a fact that employers can keep in mind as they attempt to influence behavior in this area: “Perhaps not
surprisingly, 46% of DB and DC plan participants who selected a lump sum and
are, therefore, subject to the fluctuations of the stock and bond markets,
described themselves as risk-takers, compared to 36% of those who selected a
guaranteed annuity.” In addition, 64% of DB and DC plan participants who took
the annuity (vs. 54% who took the lump sum) described themselves as
“risk-averse.”
“Among DB plan participants, 62% of those who took a lump
sum consider themselves risk-takers, while 62% of those who took an annuity say
they are risk-averse,” the analysis shows. “Among DC plan participants, 42% of
those who withdrew part or all of their DC plan balance self-identify as risk-takers
with their investments, while 67% of those who chose to annuitize their DC plan
balance say they are risk-averse.”