Traditional pensions still provide income to millions of retirees today. Many use that money, along with their Social Security, to cover everyday expenses. Some have investments, but those are saved for unexpected emergencies, inheritance or special occasions. But employers that offer pensions are a dying breed. For most Millennials, retirement will come in the form of a 401(k) style plan.
Those who are diligent at saving will retire with a large lump sum of money, but that’s where things get complicated. No worker can be sure how the market will play out for the rest of their lives, and many retirees may wind up living much longer than they anticipated. Pensions guarantee payment until you died. A 401(k) plan may leave some struggling to make ends meet.
Healthy individuals who are 65 have a 25% chance of dying by 78 or living to 91 or older. It can be difficult to know how and when to use that large lump sum of money. If you spend too much and live longer than you expected, you run the serious risk of running out of money.
“Employees will eventually be retiring with a large pile of money. They’re going to need help managing it,” says Kelly Pedersen of Caissa Wealth Strategies.
Steps are being taken to change course. President Obama made changes to regulations to make “lifetime income” part of the retirement planning process. Simply put, this would turn the typical 401(k) plan into a pension.
Employer’s haven’t quite caught onto the trend yet. A new survey from Willis Towers shows that only 5% of employers offer guaranteed income as a part of their retirement plan. Less than a quarter offer any type of tool for lifetime income. Employers that do offer tools typically only offer planning tools to figure out how much you can safely spend.
While employers have yet to really adopt this trend, they are at least giving lifetime income a thought. Only 23% of polled companies offer some sort of lifetime income tool, but 18% are planning to do so in the next year. Half of the employers surveyed said “maybe in the future.” Only 4% said they were not interested in the idea.
Many 401(k)s are also now offering managed accounts, which offer advice on how to much money to spend. Accounts are set up to send retirees a safe amount of money to spend each month. These payouts aren’t guaranteed for life, but they are a step in the right direction.
Future retirees are also turning to annuities to help save for the future. Annuities are, essentially, a contract with an insurance company that guarantees a certain percentage of income for life. Buying annuities can be confusing and overwhelming, particularly when working with salespeople that don’t have the retiree’s best interests in mind. Many are also apprehensive about turning over their nest egg to an insurance company.
Retirement grows more complicated as time goes on. The trend of moving toward customized income products is a positive one. There is no one-size-fits-all approach to retirement that works for everyone.