Workers in the United States face a host of difficulties in the effort to prepare for retirement, but while there are clear reasons for concern, there are also some powerful emerging strategies that the typical retirement saver can use to provide themselves with greater peace of mind — and greater spending power — after they exit the workplace.
In fact, according to an in-depth new report published by BlackRock and the Bipartisan Policy Center, adding guaranteed lifetime income combined with a more aggressive asset allocation can generate an additional 29% in a typical person's annual spending power from accumulated retirement savings, excluding Social Security.
Taking this approach also reduces downside risk by as much as a third when compared to a standard uninsured retirement portfolio of 60% fixed income and 40% equities, researchers say.
As BlackRock and the BPC spell out, in the first year of retirement alone, the strategy of incorporating income guarantees and redeploying the remaining portfolio to a riskier mix of assets increases spending capacity from retirement savings by 35%.
Put simply, the guaranteed income stream affords individuals more flexibility to spend early in retirement, knowing they will have at least a basic income floor in the future that will address their fundamental needs.
The report further suggests that smartly incorporating Social Security claiming into this approach to retirement can also meaningfully boost spending power. Specifically, the paper analyses the utility of delaying benefits from age 65 to age 67, finding this delay can support 16% more annual spending throughout retirement while further reducing downside risk by 15%.
Ultimately, the increased spending power generated by both strategies extends well beyond the average life span, providing a significantly higher spending floor into the typical retiree's 90s and beyond.
The Retirement Challenge
As the researchers note, although imperfect, the proverbial "three-legged stool" of retirement — Social Security, private pensions and personal savings and investments — has historically supported many Americans.
However, today's longer periods of retirement, combined with Social Security's financial challenges and the decline of defined benefit plans in favor of defined contribution plans have begun to disrupt that model. As other recent reports have warned, by some key measures, the U.S. appears to be heading from a retirement "crisis" to a retirement "catastrophe."
"Every retiree's financial situation is unique, the product of a lifetime's worth of decisions and characteristics," the report explains, citing factors ranging from caregiving responsibilities to market performance.
As the researchers point out, the totality of these factors, plus the uncertainty of mortality, compound the complexity of determining optimal retirement spending.
"Many people believe that delaying retirement or working during retirement will compensate for a lack of savings, but countless other factors, from unanticipated health problems to shifting macroeconomic conditions, can interfere with that plan," the report warns.
At the same time, longevity is fundamentally unpredictable, and individuals routinely underestimate how long they will live. In part, this is because each additional year of life increases the likelihood that a person has traits that positively affect longevity — such as good cardiovascular health — meaning one's life expectancy counterintuitively increases as they age.
Disparities along racial, ethnic, gender and income lines pervade many of these challenges. For example, Black Americans on average have shorter life expectancies and more health issues than white Americans, while women and Black and Hispanic workers on average earn less than their white male counterparts, putting them at a significant disadvantage from the beginning of their careers as they try to save.
Where the System Falls Short
According to BlackRock and the BPC, even as the shift from DB to DC plans has increased the role of personal responsibility in preparing for retirement, a growing body of research demonstrates a disconnect not only between what people should do and what they want to do but also between intentions and actions.
"In deciding how much to save and in what to invest, for instance, people are reluctant to stray from default options," the report notes. "This poses a serious risk to workers when their employer puts little thought into their retirement plan options, but it also presents significant opportunities for the private sector and government to improve financial outcomes by improving plan defaults."
The paper commends the federal government for the passage first of the Setting Every Community Up for Retirement Enhancement (Secure) Act in 2019 and the subsequent passage of the Secure 2.0 legislative package late last year. This legislation created more flexibility for employers in establishing and maintaining well-designed retirement plans, including by allowing for greater adoption of lifetime income solutions.
