Tag Archive for: retirement income

Retirement
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Sources of Retirement Income

I’ve been talking to my clients about sources of retirement income. On average, what are the most prevalent sources of income for a retiree and what percentage does each represent?”  

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Alabama is representative of a common inquiry related to retirement income.

Highlights of the Discussion

No longer do we have the old “three-legged stool” of retirement income, which consisted of Social Security, private pensions and personal savings. A 2021 study by the Social Security Administration revealed that the average retiree’s income comes from workplace retirement plans (primarily defined contribution plans) and IRAs (36%), followed by Social Security benefits (30%) and earnings from work (25%).

Retirement Income

Source: Social Security Administration, Improving the Measurement of Retirement Income of the Aged Population, 2021

The DOL’s requirement for plan sponsors to provide retirement income illustrations to participants with defined contribution plans will push the issue of retirement income even more. A key differentiator for advisors, moving forward, will be the ability to effectively support participants in transitioning away from a lump sum accumulation mindset to a true retirement income focus.

Conclusion

Nowadays, the primary sources of retirement income come from a person’s defined contribution plans and IRAs, Social Security benefits and workplace earnings. How to convert retirement plan and IRA balances into a reliable stream of retirement income is the next critical issue that needs innovative solutions.

© Copyright 2022 Retirement Learning Center, all rights reserved
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Get Ready to Explain Lifetime Income Illustrations

“When are the new lifetime income illustrations due and what should I be telling my clients who are 401(k) sponsors and participants about them?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Colorado is representative of a common question related lifetime income illustrations in 401(k) plans.

Highlights of Discussion

  • It’s good you are thinking ahead! Sponsors of participant-directed defined contribution (DC) plans must provide lifetime income illustrations to participants in their plans no later than with the second quarterly benefit statements of 2022 (i.e., the first illustration needs to be in place for the quarter that ends June 30, 2022). For nonparticipant directed DC plans, sponsors must provide lifetime income illustrations on the annual pension benefit statement for the 2021 calendar year (e.g., making October 15, 2022, the deadline).
  • Showing what a lump sum amount will equate to as monthly income is a step in the right direction because people don’t retire on lump sums; they retire on monthly income. However, some say these particular income illustrations have the potential to upset participants and force plan sponsors and advisors into damage control mode because they are based on incomplete assumptions.
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 amended the Employee Retirement Income Security Act of 1974 (ERISA) to require 401(k)s and other DC plans to include lifetime income illustrations in participant benefit statements on an annual basis. Final Department of Labor (DOL) interim final regulations, which provide the details for calculating these lifetime income illustrations, took effective September 18, 2021, and a series of DOL Frequently Asked Questions instruct plan sponsors on when they must provide the first disclosures (mid 2022).
  • According the DOL’s interim final regulations, the income Illustrations must show a monthly income amount based on a DC plan participant’s account balance as of the last day of the statement period converted to a lifetime income equivalent as a
  • Single life annuity (SLA) and
  • Qualified joint and survivor annuity (QJSA) involving a spouse.
  • The income projections for the new disclosures must be based on the following assumptions:
  • The participant is retiring at age 67 (the Social Security full retirement age for many workers) or the participant’s actual age, if older than 67),
  • An interest rate that is the 10-year constant maturity Treasuries (CMT) securities yield rate for the first business day of the last month of the period to which the benefit statement relates;
  • Life expectancy from a gender-neutral Mortality table pursuant to IRC Sec. 417(e)(3)(B), and
  • The current account value—assuming no further contributions.
  • By not accounting for future contributions, the retirement income projections will be significantly smaller than the actual number at retirement—which could be shocking—especially for younger participants. Example:  Theresa is age 40 and single. Her account balance on December 31, 2022, is $125,000. The 10-year CMT rate is 1.83% per annum on the first business day of December. The benefit statement of this participant would show the following amounts.

 

Current Account Balance $125,000
Single Life Annuity $645 per month for life (assuming Participant X is age 67 on December 31, 2022)
Qualified Joint and 100% Annuity $533 per month for participant’s life, and $533 for the life of spouse following participant’s death (assuming Participant X and her hypothetical spouse are age 67 on December 31, 2022)

Source: DOL Fact Sheet

 

  • It is essential for advisors and plan sponsors to get in front of these upcoming disclosures from a messaging and communication perspective. Specifically, advisors are encouraged to take the following steps to prepare for the statement delivery this summer and fall.
  1. Alert plan sponsors to the rules, assumptions, and the potential for negative feedback from plan participants. Explain the DOL assumptions upon which the income illustrations are based and how they may understate the actual retirement income amount—especially for younger plan participants.
  2. Craft an employee communication strategy explaining the new statements and assumptions. Provide a positive, encouraging message about the importance of making ongoing deferrals, automatically escalating deferral rates, the time value of contributions, and explain why the actual number will likely be larger—especially with ongoing contributions.
  3. Execute the communication plan and provide ongoing support.

 

Conclusion

Slowly the DC market is shifting from a lump sum accumulation mindset to a retirement income mentality. Plan sponsors soon must implement the formalized lifetime income disclosure rules. Although the lifetime income illustrations under the DOL’s regulations are far from perfect, they do press the issue of helping participants understand how their retirement plan balances translate into monthly retirement income. Plan sponsors and advisors can use this impetus to carefully craft their participant communications and messaging. A key differentiator for advisors, moving forward, will be the ability to effectively support participants in transitioning to a true retirement income mindset.

© Copyright 2022 Retirement Learning Center, all rights reserved
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Retiree Income is Higher Than We Thought

By W. Andrew Larson, CPC

Trigger warning: This blog post highlights some good and, sadly, unheralded-news about retiree income, Social Security dependence and poverty among the elderly. If good new is upsetting to you please don’t continue.

Maybe you missed it but some good retirement-related news came out recently. It seems that retiree income is actually higher than previously thought, according to a study by the Social Security Administration (SSA) . In fact, according to the information, retiree income levels where quite a bit higher than reported in other studies. In this blog we will review these findings and explore why retiree income was undercounted according to the SSA. Our source of information is the study, Improving the Measurement of Retirement Income of the Aged Population.

This ORES Working Paper No. 116 published by Irena Dushi and Brad Trenkamp came out in January 2021.Before we dig into the data, it is important to understand the entities  involved with this study. As noted, the study was an “ORES” paper. ORES is the Office of Research, Evaluation and Statistics of the SSA. The paper was unique in that it compiled data from multiple sources to obtain as complete a picture of retiree income as is feasible. To date the most commonly used data on retiree income is published by the Census Bureau and is known as the Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC) . The ORES study extended the retiree income exploration beyond the ASEC data and included IRS database information along with the  Health and Retirement Study (HRS). Once the data was compiled a more complete view of retiree income was noted with clearly positive findings.

ORES compared the various data sets to determine if the ASEC study accurately captured retiree income sources and levels. When the multiple data sets were compared with the ASEC report it was apparent that certain retirement income sources were not being taken into account. Surprisingly, the missing income pieces included distributions from IRAs, qualified plans and pensions. When these elements were added to the calculations retiree income increased by about 30 percent . To quote the study “…[the study] showed that the difference in estimated income is mainly due to underreporting of retirement income (from both defined benefit pensions and defined contribution retirement account withdrawals) and that the discrepancy in median income between survey and administrative data increased from about 20 percent in 1990 to about 30 percent in 2012. This finding reveals that the discrepancy, attributable mainly to CPS’s failure to capture retirement account distributions, arose at a time when retirement accounts and withdrawals from such accounts became more prevalent.”

This makes sense; as time goes on, retirees will have had additional time to accumulate retirement assets in IRAs and qualified accounts and the gap should increase if changes in the ASEC methodology are not forthcoming.

The ORES data also demonstrates somewhat less dependency on Social Security retirement benefits. Policymakers have expressed concern over the numbers of retirees who have virtually no retirement income or assets other than Social Security benefits. Specifically, in the original ASEC report 26 percent of retirees receive at least 90 percent of their income from Social Security benefits. Once the additional retirement savings income is included, this number decreases to 12 percent−clearly a big improvement on the Social Security dependency issue.

Recall the original intent of the Social Security system was the reduction of poverty among the elderly. Under the study, if we look at the most expansive data set, the post-age-65 poverty rate is 7.1 percent. Certainly, by that standard, the system can claim success in reducing the poverty rate.

Retiree Income Range Percentage
Less than 5,000 0.8
5,000–9,999 3.6
10,000–14,999 5.5
15,000–19,999 5.6
20,000–24,999 5.6
25,000–29,999 5.3
30,000–34,999 5.2
35,000–39,999 5.8
40,000–44,999 4.7
45,000–49,999 4.3
50,000–74,999 18.2 62.7%
75,000–99,999 12.5
100,000 or more 23.0

Conclusion

In summary, the SSA’s ORES paper has provided positive insights into how retirees are faring from an overall income perspective. These figures illustrate the current retirement system’s ability to help most (nearly 63%, see above) workers create a reasonable-more than $40,000 per year- retirement income. The system is not perfect but it is increasingly effective at delivering adequate retirement outcomes to most workers. That said let’s not be complacent; we can do more to support workers efforts towards achieving retirement income security.  Initiatives could include more auto enrollment and escalation features, practical retirement and financial education and innovative retirement income products. Gloom and doom may sell media advertising but let’s take some comfort in the fact that the retirement system seems to be on a better path that we may have thought.

 

© Copyright 2022 Retirement Learning Center, all rights reserved