Reader Responses August 15, 2016

SURVEY SAYS: Obstacles to Saving More for Retirement

Studies show a number of reasons employees give for not saving, or not saving more, for retirement—things like paying off student loans, paying for children’s education expenses, or just not making enough.
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Last week, I asked NewsDash readers, “What obstacles keep you from saving more for retirement?”

Needing enough money to pay basic monthly bills was selected by the highest percentage of responding readers (29.4%), followed by “other” (27.4%), which we will get to later. More than one-quarter said paying for unexpected expense like home repairs and saving/paying for children’s education (25.5% each) kept them from saving more for retirement.

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Nearly one in five (19.6% each) selected “not willing to sacrifice things that add to my quality of life” and “having medical bills to pay.” Not making enough income and paying off credit card debt were obstacles for 17.6% of respondents, each. Statutory limits on savings was an obstacle for 7.8% of respondents, while still paying off student loans was an obstacle for 5.9% of respondents. Nearly 10% indicated there were no obstacles to them saving more for retirement.

Among “other” responses, respondents cited daycare expenses, helping adult children or elderly parents, raising grandchildren, weddings, spouse spending habits or spouse going back to school, a summer cottage, general philosophy of balancing money and just wanting to “seize the day.”

Among those who left comments about obstacles to saving more for retirement, a few said there are no obstacles if one sets her mind to saving more, with one saying we can be our own obstacles and another suggesting we use the word “excuses” rather than “obstacles.” Others provided details about their obstacles. I can relate to the reader who said: “When the kids were finally out of the house, I thought here’s my chance to catch-up. They left alright, but I’ll be danged if they didn’t forget to take their hands out of my pockets.” Editor’s Choice goes to the reader who said: “It’s a balance. My mother and two close friends died at age 53, so I am very aware of trying to strike a balance between enjoying my life pre-retirement in case I don’t make it to retirement and preparing appropriately in case I DO.”

Thank you to all who participated in the survey.

Verbatim 

I've always said that I can never retire because I will not have enough money. According to folklore, St. Malachy predicted the end of the world will come during the reign of Pope Francis and with the choice of presidential candidates we have this year, I'm inclined to believe him. With that in mind, I may have to opt for early retirement.

Overall financial wellness is critical to saving more for retirement.

I won't be poor when I retire, but I will have to be thrifty. I started my career and raising grandbabies at about the same time. I've had 16 years to save so far and about 10 to go. Being able to start saving sooner would have helped. But life happens and you do the best you can.

I still think that there should be ways to make saving for retirement exempt from federal meddling. I keep looking back at our history, and it becomes more apparent each day that there is a real disconnect between the reality of life for most of us and what is ostensibly being done on our behalf by our politicians. Days of the "robber-barons" come to mind...

As of this year our youngest kids are finally launched; college done, weddings done, off the household payroll. So instead of socking money away for a couple additional years, the spouse up and retired! I had hoped we'd both work a while longer, but now I'm supporting a stay-home grandpa.

When the kids were finally out of the house, I thought here's my chance to catch-up. They left alright, but I'll be danged if they didn't forget to take their hands out of my pockets.

If you want afford your necessities and pleasures (coffee from Starbucks or Dunkin’ Donuts, impulse buys at the grocery store, travel, crafts, sports, etc.) in retirement, you have to find a way to put some money into retirement savings now.

I'm the retirement plans expert but it's my husband that wants to defer 100% and not spend anything now. I say we can sometimes hit the max and still enjoy life, bribing him with a steak and a beach.

There's always something that gets in the way, so saving for retirement is a never ending task.

It's a balance. My mother and two close friends died at age 53, so I am very aware of trying to strike a balance between enjoying my life pre-retirement in case I don't make it to retirement and preparing appropriately in case I DO.

Currently eliminating debt and saving for a new baby are limiting my retirement contributions; however, I never NOT contribute enough to maximize on the full employer match.

Verbatim (cont.) 

Employer contributions are low if they make them at all putting more savings burden on employees. Yet the interest rates are at an all-time low and the stock market is a rollercoaster of highs and lows where you never know if your funds will be there when you need them or not. I keep adding money to my savings, but it doesn't seem to make much difference in the end.

Homes cost more than 10 times more than when my parents paid for theirs. While not a retirement account there is something to say about owning a home.

Mid-life career changes led us to withdraw early savings to pay for graduate school. Poor economy led us to save less because we are supporting adult children and grandchildren. As a retirement professional, I am the ultimate example of "Do what I say, not what I do."

need to get it set up to happen automatically, if not, it is too easy for bad choices to be made diverting funds to pay for something else.

It bugs me to no end when people say they can't afford to save, but yet they pay for cable TV or satellite, fancy cell phones, expensive electronics and packages, expensive tattoos, expensive vehicles or homes, etc. Sometime they need to take responsibility for their decisions and make it a priority! They are their own obstacle to saving more for retirement!!!

I live in a small / modest house on Long Island. Basic living expenses from insurance, electric, water, heat, real estate taxes do not allow me to save anything anymore. That and three kids in college with 0 financial aid because of where I live is not fair. Our income is comparable to someone in Kansas if you compare expenses, yet we get nothing from financial aid. Loans are not aid.

I live frugally on my income and it is just not enough to contribute more to my 401(k). Once I get my Health Savings Account up to a balance that exceeds my medical costs I might be able to contribute more. Now that the kids are gone, it would seem like there would be more funds available but now the home repairs, put off, have to be made!

I am saving at a higher rate than many my age, but still wish I could do more.

I've been fortunate in having an excellent 401(k) plan available to me since the early days of 401(k)'s and a two earner household with decent enough income to handle those impediments to savings listed above without serious detriment to retirement savings or living standard. The obstacles I have allowed to reduce my future retirement income is not saving for it but rather investing outside my employer sponsored DC plan. The reasons for not doing so are all of the above plus my own inertia and distraction (I'm our plan administrator so the old saying 'the cobbler's children go without shoes' applies very well). But now I am of the age and point in my career where I don't have those impediments so I am trying to catch up with outside investments to augment and support my future retirement income. Unfortunately, inertia still applies and I find I have, and continue to, miss great opportunities through hesitation (or fear) of pulling the trigger on investments I feel will be winners. I continue to kick myself for missed opportunities because I can't help but think that no matter how much I have saved for retirement it is still not going to be enough.

I thank family values while growing up and the power of payroll deduction. When I changed jobs at age 32 I started "maxing out" my contributions. Three employers later, at age 56 I am on track to retire at age 60. I'll probably keep working though, as I love my job!

In theory, at different points in time, any/all of the things listed could be an "obstacle" to saving for retirement - or to paying the rent, or to eating, or - well, pretty much anything. But I've seen surveys that show people prioritizing here-and-now spending on silly things and others that show that even with real financial challenges, people still finding ways to set money aside for retirement. Personally, I've encountered them all, but never quit saving (even when I didn't have a workplace retirement plan). So, rather than calling them "obstacles," how about we use another term for these? Let's call them "excuses."

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Asset International or its affiliates.
Data and Research August 12, 2016

An Analysis of DC Plan Retirement Income Generating Strategies

A research report identifies potential strategies for setting up retirement income solutions in DC plans and considerations for plan sponsors and advisers.
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The next step in the transition from defined benefit to defined contribution (DC) retirement plans is for DC plans to offer retirement income programs that retirees can use to convert their account balances to periodic retirement income, the Stanford Center on Longevity and the Society of Actuaries Committee on Post-Retirement Needs and Risks say in a research paper.

The research report helps plan sponsors, advisers, and retirees achieve this goal by demonstrating an analytical framework and criteria for helping them evaluate and compare a variety of possible retirement income solutions. The goal is to further understanding about how to use various retirement income generators (RIGs) to meet specific retirement planning goals.

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The Society of Actuaries and the Stanford Center on Longevity analyzed retirement income generators and found there are several ways for DC plans, advisers and participants to approach lifetime retirement income.

The first strategy focuses on straightforward RIGs that can currently be made available in DC plans, including single premium immediate annuities (SPIAs), guaranteed lifetime withdrawal benefit (GLWB) annuities, and systematic withdrawal plans (SWPs) using invested assets. Within a DC retirement plan, an SWP can be implemented as an administrative feature using the plan’s investment funds.

The report notes that SPIAs provide higher expected lifetime retirement income than investing approaches that self-fund longevity risk. As a result, dedicating more savings to annuities guarantees that retirees cannot outlive their income and increases expected lifetime retirement income. But devoting savings to annuities reduces accessible wealth and potential inheritances throughout retirement.

RIGs that invest savings provide access to unused savings throughout retirement, whereas annuities generally do not provide such access. As a result, dedicating more savings to investing solutions increases accessible wealth and potential inheritances, but decreases expected lifetime retirement income. Having access to savings provides flexibility and the ability to make mid-course corrections throughout retirements that can last 20 to 30 years or more. Note, however, that there will be no further income and no accessible wealth and inheritances if retirees outlive their savings due to living a long time and/or poor investment experience.

GLWBs are hybrid solutions that both guarantee lifetime retirement income through longevity pooling and provide access to savings. These products project less lifetime retirement income than SPIAs and less accessible wealth than pure SWP strategies, but may represent a reasonable compromise between competing retirement income goals.

NEXT: Other retirement income strategies

The second strategy—using retirement savings to enable delaying Social Security benefits—increases projected average retirement incomes for all retirement income solutions studied, the report notes. Researchers’ projections assumed retirement at age 65, with the retiree withdrawing from savings the amounts sufficient to replace the Social Security benefits that are being delayed to age 70. The estimated amounts needed to replace Social Security benefits between ages 65 and 70 were assumed to be set aside at age 65 and invested in cash investments.

The third strategy is to combine qualified longevity annuity contracts (QLACs) with SWPs. A QLAC is a type of deferred income annuity (DIA) that delays the start of income until an advanced age such as 80 or 85. The potential attraction of a strategy that combines SWPs and QLACs is to try to realize the best features of both systematic withdrawals and annuities. To achieve this goal, a large portion of assets remain invested to generate retirement income and are accessible and liquid. A relatively small portion of initial assets are devoted to the QLAC to guarantee a lifetime payout, no matter how long the retiree lives.

The report notes key challenges of the third strategy for retirees and their advisers including determining the percentage of initial assets devoted to the QLAC; developing an SWP withdrawal and asset allocation approach that minimizes disruptions in the amount of income between ages 84 and 85; and deciding whether to purchase a QLAC that pays a death benefit before age 85, producing lower retirement income.

Key challenges and decisions for plan sponsors include:

  • QLACs pose communication challenges due to the potential for disruptions in income between ages 84 and 85, and if there is no pre-85 death benefit.
  • Should plan sponsors just make QLACs available to plan participants and their advisers to utilize on their own, or should they attempt to package SWPs and QLACs into an integrated retirement income solution for retirees to elect?
  • Any type of annuity presents a challenge to explain to participants, and QLACs may provide an additional communications challenge. Due to the complexity of QLACs, plan sponsors who offer QLACs may want to offer the option for accessing financial advisers who are qualified to provide advice on QLACs.
NEXT: Strategies to protect retirement income before retirement

The researchers analyzed the following strategies to protect retirement income in the period leading up to retirement:

  • Invest in target-date funds (TDFs) that reduce exposure to stocks as the worker ages, then employ a systematic withdrawal plan (SWP) to generate retirement income;
  • Buy deferred income annuities (DIAs); and
  • Invest in guaranteed lifetime withdrawal benefit (GLWB) annuities.

The researchers noted that TDFs remain vulnerable to stock market crashes and may not offer down-market protection in the period leading up to retirement. Their projections show that fixed DIAs offer the best protection against the possibility that an unfavorable economic scenario will result in retirement income being much less than expected, compared to the other RIGs and strategies analyzed. DIAs deployed at age 55 offer the most protection, although a laddered approach (purchasing small amounts of a DIA each year) produces projected results that are almost as favorable as buying the DIA at age 55.

However, the paper notes, many workers will not want to invest all their savings in a DIA, since a DIA does not have liquidity throughout retirement, a desirable feature of SWPs. In addition, using a DIA results in reduced upside potential when market returns are favorable, compared to using TDFs with SWPs.

An alternative to investing in a DIA during the period leading up to retirement is to invest a portion of retirement savings to intermediate and long-term bonds (or mutual funds), and then purchase a single premium immediate annuity (SPIA) at retirement. The goal is the appreciation or depreciation in these assets due to interest rate changes will be approximately the same magnitude as related changes in annuity pricing. Such a strategy requires sophistication from a near retiree (or an adviser) and may not deliver the same eventual income as a DIA. However, this strategy may give the near retiree more flexibility and liquidity, particularly if the near retiree is uncertain about the timing of retirement.

NEXT: Considerations for plan sponsors and advisers

When designing a retirement income program, DC plan sponsors will want to weigh the administrative and communication burdens of various RIGs and retirement income solutions versus their potential advantages, the researchers say. DC plan sponsors could help meet the varying goals of participants by starting with a straightforward retirement income program that offers the following basic RIGs:

  • The ability to purchase SPIAs that are fixed, inflation adjusted, or adjusted by a growth factor such as 3%;
  • An installment payment feature that implements a SWP with a few different withdrawal strategies, together with a few different funds with varying asset allocations;
  • Withdrawal strategies could be the Internal Revenue Service (IRS) required minimum distribution (RMD), or use fixed percentages such as 3%, 4%, 5%, or 6%. As a practical matter for tax-qualified plans, after age 70-1/2 the RMD would override the fixed percentage if the RMD results in a higher withdrawal amount; and
  • A period certain payout to enable delaying Social Security benefits.

A basic retirement income program could also help by packaging retirement income solutions. A few examples are:

  • A handful of packaged combinations of SPIAs and SWPs together with appropriate investment funds, for retirees who want to choose among a limited menu of solutions;
  • The ability to custom-mix SPIAs and SWPs in whole percentages, for “do-it-yourselfers” or individuals working with advisers; and
  • A designed default retirement income solution that might meet the needs of many employees.

The researchers note that the above RIGs and packaged retirement income solutions are readily available to most DC plans.

The analyses in the report can be used by financial institutions and advisers to help form recommendations for constructing retirement income portfolios that are in the best interest of their clients who are close to or in retirement. Advisers and financial institutions can best serve their clients if they’re able to recommend diversified retirement income portfolios with the potential to be allocated among different common retirement income classes, including Social Security benefits, invested assets, and annuities. Other assets and resources such as home equity and continued work might also be considered.

Ideally, financial institutions and advisers will want to understand each client’s goals and circumstances that can influence the retirement income allocation decision, including:

  • The desired amount of retirement income expected throughout retirement;
  • The expected pattern of change in retirement income over time, for example, to keep pace with inflation;
  • The amount of protection that’s needed against decreases in retirement income due to investment losses and interest rate changes;
  • The portion of income that the retiree wants to be guaranteed for life, no matter how long the retiree lives;
  • The current health status and life expectancy of the retiree and spouse/partner, if applicable;
  • The desired protection against the threat of long-term care, and the potential influence on the retirement income allocation decision;
  • The specific needs and desires for liquidity and access to savings throughout retirement; and
  • The retiree’s desires to leave a legacy upon death.

Each of these goals has the potential to conflict with other goals, so an important task for the adviser is to help the retiree prioritize and make tradeoffs among competing goals, the report says.

The report may be downloaded from here.

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