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Retirement Planning > Retirement Investing

Retirement, DIAs and Shortfalls in Focus: EBRI

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Deferred income annuities held within a 401(k) could be the key to a more secure retirement, according to the Employee Benefit Research Institute. EBRI found that purchases of deferred income annuities (DIAs) at age 65 with no death benefits improved retirement readiness no matter the age of death, if the purchases reflected retirement account percentages on the lower end of the spectrum.

The recent report looked at simulated retirement savings outcomes based on the percentage of the 401(k) balance used to purchase a DIA, while also looking at a simulated age of death and household income. As the research explains, DIAs are designed to reduce the probability of outliving savings by providing monthly benefits in the later stages of retirement.

“Because of their delayed payments, DIAs could be offered for a small fraction of the cost for a similar monthly benefit through an annuity that starts payments immediately at retirement,” the research, authored by EBRI Director of Research Jack VanDerhei, explained.

VanDerhei says that, at current annuity rates, a 65-year-old who purchased a DIA deferring 20 years improved retirement readiness — but specifically when those purchases were 5%, 10%, 15% and 20% of a 401(k) balance. This holds true for DIAs with no death benefits.

Using EBRI’s own Retirement Readiness Rating to score the results, the analysis shows the RRR fell overall for these purchases when they were equal to 25% and 30% of a 401(k) balance. This is partially a result of long-term care costs, the report notes.

There are decreases on RRR for those dying before benefits begin, in the age 65 to 84 age group, for the DIA or soon after benefits begin, in the 85-to-89 age group. However, for those reaching age 90, the RRR went up along with the percentage of the 401(k) used to buy a DIA.

Retirement success measures rise significantly in the RRR by adding a “pre-commencement death benefit” for those who die before benefits kick in. But the RRR will go down for those dying between the ages of 85 and 89, the research found.

The wage bracket of households also have a sizable bearing on the percentage of a retirement plan used to fund a DIA. Households with higher wages fare better in their RRR for all DIA purchases through 20% of 401(k) values, the research found. The highest age-specific wage quartile households registered an RRR improvement for all DIA purchases through the 30% level of the 401(k), the research found.

Retirement Deficits Separately, EBRI has used its retirement security projection model to assess the size of households’ retirement deficit. This is important for both policymakers and individuals, the think tank notes, because the retirement income adequacy of widows and single women has received increasing attention in recent years.

Women, it points out, are likelier to live longer than men, develop costly chronic medical conditions and spend time outside the workplace caring for children and other family members. The projection model classifies households as single female, widow, single male and widower.

EBRI concludes that the additional savings required to meet basic needs in retirement were higher for widows and single women than for their male counterparts. For married households where the woman dies first, the retirement saving shortfall for the widower is $18,476, compared with $22,783 for households in which the man dies first.

The gender disparity is starker for single men and women: $72,883 vs. $37,690. When the analysis removes households for which no shortfall was projected, the average shortfall is $76,896 for widows and $82,937 for widowers. Single women in the lowest pre-retirement wage quartile have an average savings deficit of $110,412, while for women in the highest quartile, this is just $28,951.

Single men’s lot is much better. For those in the lowest wage quartile, the shortfall is $29,736; it is $12,465 for those in the highest quartile.

Besides being more likely to have retirement deficits, single women are also likely to have much bigger deficits than others. Single women are the only group with at least 50% of households having a deficit.

The median retirement savings deficit for single women is $19,900, and a-tenth of them have a deficit of at least $222,592. Forty-eight percent of single women at the lowest income quartile have at least a $100,000 deficit, which connotes serious potential financial difficulties in retirement, according to EBRI.

By comparison, 33% of single men and 42% of widows face a similar situation.

Even in the highest income quartile, 13% of single women have a deficit of at least $100,000, compared with 7% for single men, 4% for widows and 3% for widowers.

—Elizabeth Festa and Michael S. Fisher contributed to this report


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