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Challenges to Financial Security in Retirement

The great majority of people face financial stresses of some kind, and that includes retirees. A recent article takes a look at some of the key challenges they face and their impact on retirement benefits.

In “Retirees at Risk: Five Key Challenges Retirees Face and the Impact on Their Retirement Benefits,” BNY Mellon argues that the shift from a defined benefit-based retirement plan culture to one in which defined contribution plans predominate has heightened the possibility that retirees could outlive their retirement savings.

This shift, argues BNY Mellon, “has exposed retirees to a number of risks.” Following are five matters that get at the gist of those challenges.

Replacement income. How much replacement income do retirees need in order to cover expected and unexpected expenses?

Longevity. How long will a retiree and his or her spouse live?

Market downturns. How do retirees handle market downturns that take place after they have begun to take money out of the investments into which their retirement plan funds have been placed?

Retirement savings withdrawals. How much can retirees safely withdraw from their retirement savings each month?

Cognitive risks. How should retirees arrange retirement assets in anticipation of future impairment of the ability to make good financial decisions?

BNY Mellon argues that it is necessary to view retirement through a longer lens. This is due, in part to increasing longevity. Says the article, “Retirees need to save more money than was needed in prior generations — because the money must last longer.”

Not only that, says the article, the retirement system is based largely on plans that are centered on deferrals and “were not designed to be the primary source of retirement income.” Because of that, the paper says, those plans need to evolve.

The paper says that plan participants are increasingly aware of the challenges they face in financing retirement, and a majority recognize they need assistance. BNY Mellon offers these suggestions:

  • consider providing participants with retirement income projections and gap analysis;

  • help employees better understand longevity considerations;

  • consider educating older employees about the risks of market downturns and plan options that could help mitigate them;

  • provide more education on withdrawal rates; and

  • provide plan options that incorporate some kind of mechanism that mitigates or eliminates the risk of withdrawing funds too fast.