Individuals who retired a decade ago and those retiring today have some stark differences in their income sources.
The retiree of 10 years ago likely left the working world with the traditional elements of a retirement financial plan: a defined benefit plan from his employer, a monthly Social Security check and personal savings.
In other words, that individual had most retirement assets in the form of 2 guaranteed lifetime payment streams–the defined benefit plan and Social Security. The person only needed to manage personal assets as a backstop for large healthcare or other unplanned for expenses.
The retiree of today, by comparison, has been forced by a shifting retirement landscape to take a much more active role in managing money if the person wants to ensure not outliving the assets.
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Many employers have frozen or eliminated their defined benefit plans and replaced them with defined contribution plans. The Social Security administration has increased the full retirement age from 65 to 67–depending on when the recipient was born–meaning retirees have to wait longer to collect their full benefits. And personal savings rates are down, suggesting that people are not responding to the greater retirement responsibility they now bear.
However, individuals can manage the risk of outliving their money by converting some of their assets into an income stream. They must factor in two risks when doing so: investment risk and longevity risk.
Investment risk is the risk that investment performance will be different in retirement than anticipated during retirement planning.