Keys to Facilitating Retirement Success

Examining the Employee Benefit Research Institute (EBRI)’s recent “Spending in Retirement Survey,” the institute’s Retirement Security Research Center (RSRC) identified four keys to facilitating financial security in retirement for a variety of types of retirees.

EBRI used data from its survey to divide respondents into distinct groups based on their self-reported financial status and spending behavior. They are average retirees, who make up 28% of total respondents; comfortable retirees (22%); affluent retirees (19%); struggling retirees (18%); and “just-getting-by” retirees (12%).

In evaluating the retiree profiles, the RSRC found that the most salient drivers of retirement satisfaction and security appear to be having guaranteed sources of income, carrying low debt, having a clear spend-down strategy and having access to employer-sponsored retirement help, including advisory services.

In light of this, in a Point of View document, the RSRC suggests that plan sponsors, providers and policymakers might consider:

• Adding a retirement tier—or defined contribution (DC) plan investments specifically designed for those near or at retirement—to investment choices;
• Embedding institutionally priced, very low-commission annuities into the DC plan in such a way that they are automated for retirees; and
• Rethinking how lifetime income illustrations can be used to reorient the way people think about their retirement savings. For example, such illustrations could show how a savings “floor” might be established as savings are drawn down. The illustration could show the impact of maintaining 25% of one’s balance, for instance, throughout retirement as one draws down savings. This could help retirees understand that spending in retirement is not an “all-or-nothing” proposition; it is possible to maintain a cushion and protection against late-in-life health care needs while still purchasing an annuity to have a guaranteed stream of income.

To address debt, the report says plan sponsors, providers and policymakers might consider:

• Providing a more holistic view of retirement income security that includes debt management programs for pre-retirees and retirees;
• Using technology to tailor messaging, tools and approaches for those with debt versus those without debt;
• Educating pre-retirees about the reality of working in retirement. EBRI’s Retirement Confidence Survey shows that far more workers believe they will continue some sort of work for pay in retirement than what retirees actually report; and
• Helping to create a better understanding of the importance of a mortgage-free home in retirement.

To facilitate a clear spend-down strategy in retirement, RSRC suggests plan sponsors, providers and policymakers might consider:

• How to address the behavioral aspects of retirement spending. The report says help overcoming sticker shock could allow retirees to be more comfortable with spending down their assets.
• Ways to help pre-retirees understand the realities of life in retirement so the prospect of retirement spending isn’t so daunting;
• How to make the connection between health and wealth during the working years. Health savings accounts (HSAs) can act as retirement savings vehicles, providing another potential income source to retirees; and
• Ways to create “spending paychecks.” The report says evidence from J.P. Morgan Chase research shows people manage their cashflow out of money that’s in their bank accounts. If regular income automatically flows from savings into a retirees’ checking account, it can make spending easier and increase spending confidence.

The RSRC said its partners that examined the EBRI survey—including asset managers, recordkeepers, insurance companies, banks, advisory firms and other retirement providers—focused on how to make advice more scalable so retirees with less assets have access to some level of financial assistance. They also discussed how the retirement tier could be harnessed to include embedded guidance or advice that provides support in a lower-cost, more scalable way. They noted that the traditional role of an adviser is not only one of guiding retirees’ investments but also of reinforcing retirees’ plans and helping them understand whether they’re on track or not.

The RSRC pointed out in its report that retirees’ paths may be set well before they reach actual retirement age. So, for example, addressing debt levels well before individuals approach retirement is crucial, as those facing retirement with unmanageable debt may be left with very few options to improve their situation.