Demographics, Covid speed looming retirement crisis

Well, it’s official. The three-legged stool of retirement income — pensions, Social Security, and personal savings — is dead.

At least, that’s the conclusion of a new report released Tuesday that spotlights how unprepared millions of baby boomers are for today’s retirement realities and proposes ideas for a new retirement security framework as the nation approaches a historic demographic milestone.

In 2024, more Americans will reach the traditional retirement age of 65 than at any time in history. Right now, more than 10,000 people turn 65 every day, a number that will increase to 12,000 per day as the nation approaches its “Peak 65” moment three years from now.

The report, The Peak 65 Generation — Creating a New Retirement Security Framework, focuses on a looming retirement income crisis that is the result of disappearing pensions, underfunded Social Security obligations and the pressure to create retirement income in a low-interest-rate environment.

“With the U.S. experiencing the greatest retirement surge in its history, the country’s public and private sector retirement systems have become obsolete,” according to the report released Tuesday by the Alliance for Lifetime Income, a nonprofit organization promoting annuities. “The old metaphor of the three-legged stool of retirement planning — employer pensions, personal savings and Social Security — no longer holds.”

In addition to demographic trends, the Covid-19 pandemic has accelerated the pace of retirement. Report author Jason Fichtner, a senior lecturer at Johns Hopkins University and a senior fellow at the Alliance for Lifetime Income, estimates that 4 million workers retired prematurely due to the pandemic. Forced retirement — whether due to layoffs or health concerns about returning to work — often results in people claiming Social Security earlier than planned, resulting in reduced payments for life.

The heavily footnoted report contains scads of fascinating facts, including the current and future funding status of Social Security and Medicare, the history of pensions, and the investment challenges amid historically interest rates.

For example, when many baby boomers entered the labor force in 1980, 60% of private-sector workers relied on protected income through a pension plan as their only retirement account compared to just 4% of all civilian workers in 2020. Today, only 20% of all civilian workers participate in a defined-benefit pension, with most of those workers employed by federal, state and local governments. And many of those remaining pension plans are underfunded.

As a result of the decline in defined-benefit pensions, there is now a need for a focus on the decumulation phase of retirement, the report said. Employers still have a major role to play, helping workers not just to save for retirement, but to turn those savings into retirement income that can last over increasingly longer lifetimes.

The SECURE Act, enacted in 2019, requires employers to provide plan participants with an estimate of the lifetime income that accumulated retirement savings will provide and makes it easier for retirement plan sponsors to offer an annuity option in a defined-contribution plan.

“Through the use of annuities on top of Social Security, households can create their own personal pension plans,” the report said. “One strategy for how protected income could be used to gain additional Social Security benefits would be to purchase a term annuity as a ‘bridge’ between stopping work and claiming Social Security at either the full retirement age or age 70 in order to maximize Social Security monthly benefits.”

The report also highlights the role that financial advisers can play in helping workers create a more secure retirement.

“Since many workers are asking their employers to help them save and plan for retirement, employers should consider offering professional advice as a workplace benefit to their workers,” the report said. Employees are seeking professional financial advice on a wide variety of issues, including saving for emergencies, a home, education and even help with basic financial literacy.

In general, financial professionals should encourage optimal Social Security claiming strategies to maximize benefits and incorporate annuities into clients’ retirement portfolios as an efficient way to generate protected income in a low-interest-rate environment.

“The countdown to Peak 65 is on and is a wake-up call that the retirement income crisis in America is no longer just looming, it’s here,” said Jean Statler, CEO of the Alliance for Lifetime Income. “That’s why there’s more urgency now than ever before for collective action to equip boomers — as well as those that follow — with retirement plans that include protected income to fill the gap that Social Security leaves, which will give them the protection they need and want.”

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