Retirement Saving: More Than Setting Money Aside
We’re living longer than ever. But no one told the economy that, so for most of us saving enough to cover our expenses late in life after we’ve retired takes planning and good choices. Recent pieces from The Wall Street Journal
and the Brookings Institution
highlight expanded options but counsel care in making selections.
The Brookings Institution cites statistics from the National Institute for Retirement Security (NIRS) and the Boston College Center for Retirement Research (CRR) that highlight the need to increase retirement saving: NIRS says the gulf between what’s needed to cover retirement and what has been saved is $14 trillion wide, and CRR says that in 2010, more than half of U.S. workers was on target to be unable to provide a comfortable retirement for themselves. These figures, Brookings notes, contrast sharply with pre-Great Recession measures of retirement readiness.
But simply saving is not enough, Brookings argues; how funds are invested and spent is also an important consideration.
In their paper “Retirement Savings: A Tale of Decisions and Defaults
,” Loretti Dobrescu, Xiaodong Fan, Hazel Bateman, Ben Newell, Andreas Ortmann and Susan Thorp argue that the choices can begin even before the savings do. Their research examines the choices that are made in setting the payroll deferral rates for how much of an employee’s paycheck will be set aside in a retirement account. Not surprisingly, they found that default choices can have a significant effect on retirement savings.
Once the saving has begun, there are more choices to be made — and Anne Tergesen in The Wall Street Journal discusses one of them, longevity annuities, which have garnered extra attention this summer. She notes that they offer a lifetime stream of income but do not provide payments as soon as other annuities; consequently, the payments they provide are larger.
Tergesen notes that in July, the U.S. Treasury adopted rules that encourage longevity annuities. The IRS had required that longevity annuity holders’ required minimum distributions had to start at age 70-1/2, but now that rule does not apply for holders who agree to wait till age 85 for payments from their longevity annuities to begin.
Proponents of longevity annuities argue that they make retirement planning simpler and easier. The downsides, Tergesen points out, are that a longevity annuitant must surrender principal to an insurer and if a holder dies before payouts begin, the principal remains with the insurer. Tergesen argues that investors should carefully select the insurers through whom they purchase annuities.