Two-thirds of ‘Peak Age’ Boomers Face Retirement Risk

PlanAdviser, Alex Ortolani

Two-thirds of Baby Boomers turning 65 between 2024 and 2030 will not be financially prepared to maintain their pre-retirement lifestyles, especially when taking into account gender, race and degree of education, according to research released Thursday by the Alliance for Lifetime Income.

Due to the lack of financial preparedness, more than half of 30.4 million boomers in the “peak” age range will rely primarily on Social Security for income, according to the paper written by Robert Shapiro, the former undersecretary of commerce for economic affairs. The findings are based on 52.5% of this cohort having assets of $250,000 or less, meaning they will likely run through their savings well before they die, according to the researcher. Meanwhile, 14.6% have assets of $500,000 or less, which will still be a stretch due in part to people living longer.

“The median retirement assets with Social Security are not adequate to maintain the peak Boomers pre-retirement level of living or lifestyles,” Shapiro said during a presentation of the research at the National Press Club in Washington D.C. “The fact is that there are very large gaps, and in particular enormous gaps in retirement access based in part on race, but to a lesser degree gender, and most importantly with respect to education.”

The paper is part of a series of public campaigns addressing Peak 65 in the U.S. by the alliance, with the organization’s key proposal being for plan sponsors and workers to implement guaranteed income annuities to supplement Social Security. The organization is a non-profit 501(c)(6) formed in 2018 by 24 financial services firms, including insurers and asset managers such as American International Group Inc., Franklin Templeton, J.P. Morgan Chase & Co., Lincoln Financial Group, Prudential Financial Inc., and TIAA.

During the presentation and panel discussion Thursday, Shapiro and financial industry representatives focused on the “three-legged stool” notion of retirement backed by Social Security, personal savings and employer pensions. With the decline of the defined benefit system, the third leg is currently missing in terms of a guaranteed retirement paycheck, noted Jason Fichtner, executive director, retirement income institute and chief economist for the Bipartisan Policy Center.

“How do you take the accumulation [of a defined contribution savings plan] and replace it with DB’s place in the market?” he asked. “That is where we see the role of annuities.”

Fichtner noted that Social Security is intended to replace about 40% of a person’s annual pre-retirement income according to the Social Security Administration.

Stark Disparities

Shapiro, the report’s author, also detailed the disparity of outcomes that peak-age boomers will face when considering gender, race, ethnicity and education. In the report, he found the median retirement savings for the cohort to be:

  • $269,000for men versus $185,000 for women;
  • $299,000for whites versus $123,000 for Hispanics and $49,000 for Blacks; and
  • $591,000for college graduates versus $75,000 for high school graduates and $7,000 for those without high school diplomas.

The economist said people without a college degree are “by and large” not prepared for retirement, with the single-largest asset for most people being home equity. But even if that potential nest egg exists, the majority of seniors “do not want to sell their homes” as they are often near friends and families, Shapiro told the audience. He also noted a decline in people taking home equity loans, which would be another option to create cash flow.

The economist also focused on the risks women face in retirement in part due to disparities created during their working years.

“There is a persistent and significant disparity between the assets of men and women,” Shapiro said. “This shouldn’t be surprising in the sense that there are persistent disparities in earned income between men and women and savings comes out of earned income, particularly if you don’t have a defined benefit pension.”

Slow Uptake

William Gale, chair, federal economic policy at the Brookings Institution, noted that he is a “fan” of annuities in addressing retirement income needs and that retirement policy reform in recent years has forwarded them within workplace savings plans. However, he noted, annuities “haven’t taken over the world” in part because the end users may not want them.

“The problem is partly that when people are reaching retirement age, they have more retirement wealth than at any time in the rest of their life,” he said. “It’s probably not the optimal time to start thinking about outliving those resources.”

Report author Shapiro noted that, when people consider annuities, they often view them as too expensive in part because they underestimate how long they will live and need such a safety net.

“When people look at annuities, they say, ‘These are too expensive because I’m only going to live for 10 or 15 more years,’” he said. “But providers have to price the annuities based on the actual expectations … there is this asymmetry of information which appears to limit much of the annuity market to the most risk-averse people.”

Other panel members championed the need for annuities to be a bigger part of the retirement picture to secure a three-legged stool for more Americans. Bryan Pinsky, president of individual retirement at Corebridge Financial, said education is key for people to realize the potential for annuities to help them secure a paycheck.

“We haven’t done a good job of educating people about how to use these piles of money they’ve accumulated,” he said. “I still think that for the average American getting advice is critical to help them think about what their options should be and how an annuity would fit into their overall plan is critical.”

He noted progress toward showing people how an annuity can help through required disclosures put into place by the Setting Every Community Up for Retirement Act of 2019; that legislation requires defined contribution retirement plans to express a participant’s current account balance as two monthly income illustrations—a single life annuity and a qualified joint and survivor annuity.

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