As life expectancy increases it’s only going to become more difficult for Americans to pay for their retirement. When 401(k) plans emerged 40 years ago, not much thought was given to how workers would use the money they accumulated. It has only been fairly recently that the concept of “retirement income” has taken shape, mostly in response to workers expressing deep concerns about what their futures might look like. This report looks at new ways to address retirement income and decumulation to help retirees live life more fully through more efficient use of their assets.
BlackRock believes successful solutions will extend beyond investment products to re-orient participants around “income as an outcome.” This includes helping to clearly explain how today’s contributions can translate to potential retirement income, and to help simplify and streamline the complexity of guaranteed income through annuities.
“All hands on deck” moment
The U.S. is facing a retirement crisis. Forty percent of households approaching retirement age have zero savings, and a quarter of American seniors could not fund two years of paid home care even if they liquidated all of their assets.1 The COVID-19 crisis has magnified these troubling trends, underscoring the work that must be done to provide workers and retirees long-term stability and security.
“We see this as an all-hands-on-deck moment, requiring collaboration across the entire retirement ecosystem, and we are committed to doing our part,” said Anne Ackerley, Head of BlackRock’s Retirement Group. “In our conversations with clients, retirement security is a top priority, as it must be for all of us.”
Nobel Laureate, Bill Sharpe, called decumulation in retirement “the nastiest, hardest problem in finance.” 2 And research has shown it’s certainly a subject that keeps a lot of people up at night. Massive progress has been made in recent years regarding defined contribution (DC) plan participation, and target date funds (TDFs) have proven to be a reliable go-to for investors and plan sponsors. The overall success of TDFs has created what Robert Crothers, Director, Head of Product for BlackRock’s Retirement Group, calls an “ecosystem” in which to best develop solutions for retirement income. For this conversation with II on what is perhaps currently the most innovative solve for retirement income, Crothers, who oversees all product management and development functions for BlackRock’s retirement products, was joined by Nick Nefouse, Managing Director, Co-Head of BlackRock’s LifePath® target date fund franchise, and Head of Investment Strategy for BlackRock’s Retirement Group.
Why do so many American workers still have serious concerns about whether they’ll have enough money to retire – and specifically about income during retirement?
Robert Crothers: It’s a combination of things. First, just the sheer number of people retiring. There is some data that suggests as many as 10,000 baby boomers reach retirement age every day.3 The size of that generation has put more focus on retirement preparedness. And, of course, far fewer people have access to defined benefit (DB) plans today than was the case even 10 years ago. Essentially, we moved from a market where the company carried you and sent you a check in the mail or made a direct deposit on a regular basis, to a market where the retirement burden has shifted largely to the individual. That, in a nutshell, has produced a model where you give retirees a lump sum check, and say, “Good luck!” – with limited or no guidance, and limited or no financial wellness or financial literacy education along the way.
Where are we on the curve of American workers realizing and acting on the idea that retirement saving and income is really up to them?
Nick Nefouse: Access is everything. About half of the country has access to a 401(k) plan. That half of the country seems to be well on the path to retirement, or at least has a good starting point on that path. Half of the country doesn’t have a 401(k), and not always for bad reasons. Many small businesses and startups likely won’t have a plan in place, some workers are transient, and so forth. People who have access to 401(k) plans tend to do a better job saving because the features of plans have evolved to allow them to save. [Nobel Prize-winning economist Richard] Thaler coined what he calls libertarian paternalism, and the idea, to paraphrase, is that you have a lot of choices, but if you choose nothing, “we’re” going to take care of you. In the context of this discussion, the “we” are plan sponsors and the features of a DC plan, such as auto-enrollment, auto-escalation, and target date funds. When you combine those things, you can get better savings rates – but DC plans aren’t everywhere yet.
Crothers: If you think about the transition from accumulation in your working years to decumulation in retirement, it’s full of uncertainty and questions around things that aren’t knowable – how long will you live? What will your health-related spending needs be later in life? This problem isn’t just potentially mathematically difficult, but also difficult because there are behavioral and personal elements involved. Your decision to retire is arguably one of the most uncertain periods of your working life because you don’t know what the future holds – but still you’re expected to plan and spend and save perfectly without a tremendous amount of guidance, and without the safety of a paycheck throughout retirement.
What interesting recent insights have you heard from plan sponsors about participant behavior?
Nefouse: A common thread is that the investment industry and plan sponsors have done a good job of helping people accumulate wealth when they have access to 401(k) plans. There’s general agreement that 401(k)s with target date funds tend to have low-cost, professionally managed and diversified portfolios. And there’s agreement that other things are good – auto-enrollment, auto-escalation, and those get your dollar cost averaging going. All of those things are really good. But for investors, when retirement arrives there is still uncertainty, and it manifests itself in their actions. For example, people will anchor to whatever their account balance is at retirement. We looked at a cohort of people who were 18 years into retirement and still sitting on 80% of their wealth. Average life expectancy at 65 is about 19 years, so what we’re seeing is some people still have 80% of their wealth 18 years after retirement. They anchor to a number and just spend their capital gains and Social Security. The effect of this is they lead different lifestyles compared to what it could be like if they spent to their full potential. Plan sponsors are seeing this, particularly more paternalistic ones, and trying to offer ways to help.
Further, an economic environment like the one we’re currently in – market volatility, uncertainty around what’s going on economically – can take an economic toll on someone who is at or near retirement. If you have 30 or 40 years of your working life to ride out volatility, that’s fine. But if you’re near retirement, can you see a major market dip a few months down the road? Maybe, maybe not. And if you’re relying on asset spend down to fund retirement spending, how does volatility and growth and income all balance together? These are very top-of-mind questions for people in that position today, who for 10 years saw the market go up pretty consistently, but have seen the opposite for a vast majority of this year.
What is needed to help address the challenges of generating retirement income?
Crothers: A general goal of enhancing retirement income solutions is to create simple access to guaranteed income. In a way, it’s almost like bringing back a DB-like experience for a participant cohort that hasn’t necessarily had access to a DB plan and likely won’t in the future. We find that plan sponsors are looking for better retirement income solutions to help improve certainty that participants can retire with dignity, and participants are looking for certainty around what they’re going to get – a guaranteed income stream to go along with Social Security and any other assets they might have to spend.
As a significant player in DC, we know that people need help with decumulation, and that simply having a large menu to choose from, or a portfolio of funds, doesn’t lead to an obvious amount of income in retirement. Instead, as an industry we need to address simplicity by solving for convenience, choice, and cost.
How do you approach educating participants about retirement income?
Nefouse: Simplicity. If you’re buying a new car and the salesperson is telling you about the engine, the exhaust system, and powertrain, you may not understand – and that’s often how conversations about investing happen. People really just want to understand the benefits and cost in uncomplicated terms.
We also see good engagement when we talk about personal income in retirement as opposed to an account balance. People know they have a balance, but they don’t know if $200,000 is a lot or a little in retirement, or if $1 million is a lot or a little. They likely become interested when you educate them on how much money they may actually need in retirement.
401(k) plans are entering a new phase: an era of decumulation. More assets are now flowing out of America’s 401(k) plans than being contributed from participants’ paychecks.4 And with that change, plan sponsors now find themselves shifting focus to helping retiring participants understand and meet their retirement spending needs.
As noted in the interview above, recent reports from BlackRock in conjunction with the Employee Benefit Research Institute (“EBRI”) found that across all wealth levels, most current retirees still have 80% of their pre-retirement savings after almost two decades in retirement. Digging deeper, across all wealth levels measured, more than one third of current retirees actually grew their assets – leaving considerable potential retirement income on the table.
Looking forward: retirees may need to spend down their assets
Many of the retirees captured in this research were fortunate to be able to maintain a reasonable standard of living without significantly tapping into their retirement savings principal. This may not be the case for future retirees as a result of:
- Pension benefits: On average, 42% of the retirees tracked in the research received income from a DB pension plan; few, if any, of those retiring over the next 10-20 years can expect income from a DB plan.5
- Social Security: Income from Social Security is the largest component in the retirement income mix for all retirees, but pressure on Social Security finances could lead to a future drop in benefits.6
- Rates of return: Over the past 35+ years, a broad array of asset classes delivered robust returns; at BlackRock, we believe fewer asset classes are expected to perform at the same levels in the future.
- Savings behavior: Future retirees may be more dependent on their savings than previous generations, and they may need to develop strategies for drawing down their retirement assets.
- Longer life span: People are living longer and will need to have their retirement assets last longer, in some cases much longer.7
Shifting demographics and a more challenging market environment will only elevate the complexity and importance of helping retirees maximize the value of retirement savings. But with improved savings behavior, steady and consistent investing, and education on how to generate retirement income, we believe future retirees can take the steps necessary toward a comfortable standard of living.
- GAO, “Survey of Consumer Finances,” 2016; Health Affairs, “The Financial Burden Of Paid Home Care On Older Adults: Oldest And Sickest Are Least Likely To Have Enough Income,” 2019
- Employee Benefits Security Administration, U.S. Department of Labor. Private Pension Plan Bulletin Historical Tables and Graphs 1975-2016, December 2018, p. 25, https://www.dol.gov/sites/default/les/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletinhistorical-tables-and-graphs.pdf
- EBRI, FAQs About Benefits—Retirement Issues: What are the trends in U.S. retirement plans?
- The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, April 2019, https://www.ssa.gov/OACT/TR/2019/index.html.
- Center for Disease Control and Prevention. Life expectancy at the age of 65 years in the U.S. from 1950 to 2016, https://www.cdc.gov/nchs/data/hus/2017/015.pdf.
This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the global retirement landscape. The opinions expressed herein are subject to change at any time due to changes in the market, the economic or regulatory environment or for other reasons. The material does not constitute investment, legal, tax or other advice and is not to be relied on in making an investment or other decision.
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