Individuals and institutions can take three important steps to improve retirement security prospects, according to a paper issued by Christine C. Marcks, president of Prudential Retirement.
First, the bad news:
The Center for Retirement Research (CRR) at Boston College reported that the percentage of U.S. working-age households at risk of being unable to maintain their pre-retirement standard of living once retired rose from 30% in 1989 to 51% by 2009. The cost of retirement is rising, life spans are getting longer and healthcare costs are getting higher while interest rates are anemic, among other enormous societal and economic factors, Prudential and many others have pointed out.
In fact, Federal Insurance Office (FIO) Director Michael McRaith, identified the interest rate environment and the demographic realities as the first epic focus of the Federal Advisory Committee on Insurance (FACI) work recently. See: http://www.propertycasualty360.com/2012/04/02/mcraith-steers-faci-discussion-away-from-pet-issue
Prudential is marking National Retirement Planning Week beginning April 9 by encouraging American workers who are not currently saving for retirement to begin investing at least 1% of their income in a 401(k) plan with the hope of increasing those savings over time.
Now the solutions, as seen by Prudential:
The first step is most critical in combating this risk, and goes straight to a worker’s and an employer’s behavior via improving overall saving and investing–only about half the U.S. workforce is offered a pension or retirement plan at their place of employment, the paper noted.
Marcks highlighted as a potential partial solution a proposal calling for the widespread creation of Multiple Small Employer Plans (MSEPs).
“MSEPs would allow employers with fewer than 100 employees to pool resources under a single defined contribution (DC) plan, resulting in lower costs and simplified administrative requirements,” the paper noted.
Second, Prudential Retirement is suggesting the return of guaranteed income–however, it can no longer be in the defined benefit plans that were the hallmark of the past century. Instead, it promoted new variable annuity products with guaranteed income streams and flexible payment and withdrawal schedules.
Some of these popular products offer a guaranteed minimum withdrawal benefit (GMWB) that would assure that participants continue to receive income for life even if their retirement assets were exhausted due to longer-than-average lifespans and/or poor investment performance. See: http://www.tiaa-cref.org/public/support/help/ask-tiaa-cref/annuities/index.html
These products are usually riders on variable annuities that come with a cost for added protection for these guarantees, but in an uncertain retirement world, many are flocking toward guarantees where they can get them.
Guaranteed lifetime income products may also help by raising the risk tolerance of investors. In a recent Prudential survey, 84% of investors indicated that if they had an investment product with guarantees, they would likely stay in the stock market even if they experienced short-term losses.
These products with guaranteed features have been very popular in the past 10 years and Prudential has been focused on devising more annuity products to meet market needs.
In 2010 alone, sales of variable annuity products with guaranteed lifetime income features totaled $81 billion.
Thirdly, Prudential suggests optimizing Social Security benefits. In particular, the report noted, married couples should plan their claiming decisions together to take full advantage of the worker and spousal benefits available to them. Many valuable planning options become available once a spouse reaches his or her full retirement age, which is now 66.
Married couples also should consider how delaying the claiming of Social Security can provide higher lifetime income to a widow or widower in the form of a future survivor benefit, the paper noted.
Moreover, creating larger streams of income in the form of Social Security may also lower lifetime taxes paid in retirement. As a result, retirees may be able to stretch their retirement resources over a greater number of years, the report concluded.