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Rethinking Retirement: Americans Must Have New Tools to Prepare for Retirement…and a New Definition of Retirement Itself

A New Way of Looking at Retirement

The most effective solution to retirement income shortfalls may require a complete rethinking of retirement… but Americans are already doing that. A number of studies, including one by Merrill Lynch, have shown that the next generation of retirees is very interested, even excited, about opportunities to work in retirement.

Baby boomers say they want a phased or cyclic retirement that includes working part time, or moving in and out of the workforce, or starting a business of their own, after their primary career has ended but before stopping work altogether. (See Figure)

By continuing to work, Americans can delay their “normal” retirement date and allow their retirement savings to continue accumulating. Delaying “full” retirement can also increase the retirement income to be received from Social Security and any pension benefits that are due. By continuing to work — for both personal fulfillment and financial reasons — Americans can mitigate the risk of living “too long” and enjoy a new, perhaps more meaningful phase of life.

Traditional thinking says that there are two phases of retirement planning — accumulation and withdrawal. That model is changing, however, with more and more people indicating a desire to:

• Use current income to accumulate assets and create future income potential during their career, then

• Spend time growing both personally and financially during this new retirement phase while tapping into their assets as needed, and finally

• Insure against unexpectedly long life spans or extended elder care needs.

Merrill Lynch views these three phases as an income management continuum. Each of us must manage the income we have, making financial choices and trade-offs throughout our lives. We must set aside income in some stages to create income in others. We must work much of the time to provide income for periods when we will be working less or not at all. There is no substitute for planning and saving.

The bad news is that for most Americans, the burden of planning for retirement income has shifted onto the shoulders of each individual. The good news is that within the now-dominant defined contribution environment, tools such as automated enrollment, and sophisticated-yet-simple advice services are available today to assist in saving for retirement. “Automating” the process of retirement planning, saving, investing and managing is one way to help encourage people to save. Automated steps can include: enrollment, contribution increases, asset allocation, and rebalancing.

It is essential, however, that we explore new opportunities and create an environment where new retirement savings and investment solutions are possible within the structure of retirement programs that exist today.

One solution to help retirees improve their chances of having enough income throughout retirement is for plan sponsors to provide a defined benefit-like opportunity within a defined contribution plan. A deferred, fixed group annuity offered within a defined contribution plan can offer pension-like benefits:

• Reliable income. Participants know how much retirement income they will receive for each contribution made.

• Monthly checks in retirement. While they're working, participants can make either payroll deferral contributions or transfer in funds from their other investment options. These funds can be used to purchase a future stream of income that the participant cannot outlive. Inflation-adjusted payments may also be an option.

• A wide range of payout options. Participants can choose income for themselves only, or for themselves and a beneficiary. The income can be for life, or for life with a guarantee period. Participants can also choose to take the proceeds as a lump sum.

Americans can meet their retirement income needs, with help from policymakers and regulators, plan sponsors and providers. Plan sponsors who give employees planning tools and investment options are also helping to fulfill the sponsor's fiduciary obligation.

It is our obligation as a society and as individuals affected by the nationwide outcome to explore these new opportunities, adopt at least some of their precepts, and utilize the tools provided to ensure adequate income when our working years end completely.

Cynthia Hayes, C.F.A is a First Vice President responsible for the Employer Plan Retirement business at Merrill Lynch.  

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