The difference is significant: With a pension, the worker knows exactly how much he or she will be paid in retirement. With a 401(k), the worker only knows how much he or she is saving.
Studies show that Americans are retiring later than ever though COVID and the recession may change that. New studies and research papers are digging in to how the Boomer Generation is retiring. Those details show unsurprising results, like longevity and better health. But they also show interesting details financial advisors may want to watch.
That folks are retiring later is no surprise. Factors like tax incentives and a rising cost of health coverage keeping folks in the workforce has been well down for years now. Additionally, research shows that couples retire in tandem, meaning as women in the workforce continue to move into career-based jobs, their husbands (statistically older than them) delay retirement to accommodate specific career goals. But research shows interesting trends. One among them is that the shift from pensions to 401(k)s may be delaying retirement. “The difference is significant: With a pension, the worker knows exactly how much he or she will be paid in retirement. With a 401(k), the worker only knows how much he or she is saving.” That trend in delaying retirement age due to investment product reliance if the reliance on 401(k)s shifts again for GenerationX, who may need to eschew (or add to) reliance on 401(k)s for other retirement products, like annuities due to a lack of time.
The pandemic may have also altered retirement timing. According to the Congressional Research Service (CRS), “[i]n 2021, about one-fourth (25%) of new retired-worker beneficiaries were age 66; 18% were over the age of 66.”  The CRS examined trends in retirement age as part of potential legislation to increase the retirement age. They note that gains in life expectancy aren’t uniform across all demographics. “Opponents of increasing the retirement age often argue that gains in life expectancy, health status, and job characteristics have not been equally distributed across individuals with different characteristics such as sex, race, educational attainment, or income level.” Research from other independent groups supports that demographic distribution in ways financial advisors may need to heed.
“For men …. [t]he average retirement age increased by three years from 62.6 in 1990 to 65.6 in 2019, before declining a bit during the pandemic. The upper retirement age increased from as low as 67.25 in 1991 to as high as 73 in 2018, an increase of almost six years, before declining to around 71 more recently. The increase in lower retirement age was more modest, from as low as 58 in 1994 to a sustained 60 in the late 2010s. For women, we observe … more volatility at the lower end. In particular, the average retirement age increased from 59.5 to 63, an increase of three and a half years, from 1990 to 2021, with no falloff during the recent pandemic.” The differences in gender around retirement age related to the pandemic are worth noting for advisors. Additionally, there are also significant differences in retirement age by education level, with those holding a college degree, on average, retiring two to three years later than those without one.
Research from the Pew Research Center shows that the pandemic seems to have had even more of an impact on retirement age. Prior to the pandemic, 48% of adults 55 and older were out of the labor force due to retirement. By the third quarter of 2021, that number had increased to 50.3%. The impact is even higher among older adults. In the third quarter of 2019, 64% of those 65 and older were retired. Two years later, that number swelled to 67%.
Experts say that the recession sparked by COVID was a “significant change in a long-standing historical trend toward declining or steady retirement rates among older adults.” Other recessions have pushed retirement rates down. “By the third quarter of 2010, 48% of adults ages 55 and older were retired, down from 50% in the same quarter of 2007.” The increase in retirement now, during the current recession-like period, may be linked to the rising value in housing and other assets.
But there is a potential conflict here for clients. On the one hand, it may be easier to retire now with housing values promising strong assets. On the other hand, research indicates that more educated workers delay retirement due to a stronger affiliation or identification with their jobs. The gender difference in retirement based on the pandemic noted above could reflect that. Further, the changes in older workers still in the workforce could reflect a stronger work affilation. “There are smaller but still meaningful declines in the number of U.S. adults aged 65 to 69 (from 76% to 70%) and those aged 70 to 74 (from 88% to 83%) who are retired.” Its unclear whether those are of educated or less educated workers.
Other issues financial advisors may want to consider include the continued gap between what clients report their planned retirement age will be and what their actual retirement age is. “Gallup has consistently found that retirees' reported retirement age has been about five years younger than nonretirees' expected retirement age…. However, as both the expected and actual retirement ages have increased in the past two decades, and more recent retirees are subject to new age requirements for receiving full benefits, the gap between expected and actual retirement ages has persisted.”
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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