401(k) plans may not last long enough in retirement

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Older Americans can have a number of different goals with their retirement savings. But usually their main goal is the same: to make it permanent.

Unfortunately, many younger baby boomers and members of succeeding generations who don’t have access to a traditional pension may survive the funds in their 401(k) accounts, according to a recent study by Boston College’s Center for Retirement Research.

The economists compared takedown rates between those with traditional annuities and those with just 401(k) savings accounts. Although most research into how long pensioners’ money lasts is based on the former category, the majority of people now fall into the latter.

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“What most people could observe were people with traditional pensions,” said Gal Wettstein, a senior research economist at the Center for Retirement Research at Boston College, noting that 401(k) occupational pension plans were not widely adopted until China 1980s.

These analyzes based on retirees with pensions found that they often did not spend their savings at all. In fact, many saw their nest egg continue to grow after they stopped working.

“However, this optimistic notion from the past could give a false sense of security,” Wettstein said.

Retirees with 401(k)s are often quick to spend their savings

Access to traditional pensions has been scarce for decades. Workers are increasingly being tasked with saving for their later years themselves in investment accounts, the flagship of which was the 401(k) plan offered by employers.

The researchers found that these plans are exhausted much faster than expected.

An example in the analysis looked at households that retired with $200,000 in savings. According to their analysis, by age 70, retirees who had a 401(k) plan but no annuity had $28,000 less than retirees who had an annuity — a difference of one-eighth that starting balance. At age 75, 401(k) savers had $86,000 less than those who were in retirement.

“People spend a lot of their belongings when they have a 401(k),” Wettstein said.

The rapid drain on savings in 401(k) accounts means many retirees who depend on them risk fully depleting their funds by age 85, although about half of them will live beyond that, according to the study.

Although they continue to receive their monthly Social Security checks, Wettstein said, “that’s not usually a sufficient substitute for their career-level income.”

Pensions helped ‘how much you could afford’

Because of the relatively new nature of 401(k) plans, more needs to be known about why retirees are draining their accounts so quickly, Wettstein said.

However, some of the reasons can be conjectured. Those who had a traditional annuity that guaranteed a fixed payment each month until death were likely to have had less to draw on their savings because of this reliable income. They may have been able to keep their savings for inheritance purposes or in case of unexpected later expenses.

We did this as a first look at whether we should be concerned.

Gal Wettstein

Senior Research Economist at the Center for Retirement Research at Boston College

On the other hand, many retirees without a pension rely on their own nest egg to cover a large part of their monthly expenses. Without a pension, people are also responsible for ensuring they have saved enough to get through their after-work stint, a task that requires decades of decent income and discipline.

Additionally, a challenge with 401(k) savings plans is that they charge retirees how much to withdraw each month. That calculation can be difficult to make, and while those with substantial savings aim to live on the earnings of their money, the market is unpredictable and has periods – like now – when it needs more than it gives.

“One of the benefits of the pension system was that it reassured you how much you could afford, practically in that it never ran out, and also in a sense of advice because it says ‘Here you can spend so much because next month you get the same amount back,'” Wettstein said. “A 401(k) doesn’t give you that.”

Wettstein emphasized that it’s still too early to get a full picture of how successful 401(k) accounts are for permanent retirees.

“But we did this as a first look at whether we should be concerned,” he said. “And the conclusion we’ve drawn is, yes, we should.”

This article was written with support from a journalism grant from the Gerontological Society of America, the Journalists Network on Generations, and the Silver Century Foundation.