Baby boomers, the generation of Americans born between 1946 and 1964, were subject to a “massive shift” in retirement planning, as employers transitioned from defined benefit plans to defined contribution plans. While defined benefit (DB) or pension plans provide beneficiaries with a guaranteed income stream, defined contribution plans like 401(k)s are typically much cheaper and less complicated from the employer’s standpoint — but they don’t give employees as secure of a future.
As a result, people born after 1960 have had limited access to pension plans, whose availability has dropped precipitously since 401(k)s were introduced. Using data from the Health and Retirement Study, CRR researchers found that a majority of households with heads born between 1920 and 1940 had access to a DB plan.
“Retirees with a DB had less need to draw down financial assets in their retirement accounts to cover their spending and could reserve these assets for late-life medical expenses or bequests,” CRR’s Robert Siliciano and Gal Wettstein wrote.
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Without the guaranteed income stream that a pension provides, baby boomers may run a higher risk of outliving their retirement savings, known as longevity risk. In fact, Siliciano and Wettstein compared the drawdown speed of retirees, both with and without access to DB plans, at age 70, 75 and 80. At all three ages, retirees with DB plans had slower drawdown rates.
The researchers found that retirees with $200,000 in starting wealth and access to a DB plan have $28,000 more in assets by age 70 than their counterparts. “By age 75 and by age 80, the household with a DB plan has drawn down 36 log points less of their initial wealth, corresponding to $86,000 more wealth,” Siliciano and Wettstein wrote.
The researchers concluded that baby boomers who base their forecasts on the drawdown speeds of past generations “likely underestimate” the speed at which they’ll go through their retirement savings.
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October 24, 2021 at 07:00AM
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