The Face of Retirement is Changing

In the last generation, most retirees have a pension and Social Security. But today many employers have migrated from pensions to defined contribution plans. From 1985 to 2000, the rate of participation in pensions by full-time employees of medium and large private firms dropped from 80 percent to 36 percent. A 2013 survey by the Bureau of Labor Statistics found only 26 percent of civilian workers in the U.S. participated in defined benefit pension plans.  The boomer generation is often referred to as the “sandwich generation,” because they are paying for their parents’ elder care as well as the tuition of their children. When you add the funding of their retirement plan, there’s not much money left to pay off a mortgage.

Presidential candidates have promised Social Security will not be altered for baby boomers, but Congress has changed things over the years. With the most recent changes coming with the passing of the Bipartisan Budget Act of 2015, most baby boomers lost income from the elimination of the “file and suspend” provision and age tested restrictive application benefits. But perhaps the biggest change and the greatest risk in retirement isn’t legislation, but living longer.

Today, the average life expectancy for men is 86.6 years and for women 88.8. The impact of longevity on retirement modeling has created an environment fear among of among seniors of outliving their money. One answer to longevity problem maybe annuities. Annuities can be structured to pay guaranteed lifetime income with annual increases. Today, more retirement plans are using guaranteed lifetime annuity income to pay for household living and travel expenses. The structured payout can cover two lives and provide income for the survivor.

Two years ago, Qualified Longevity Annuity Contracts or QLACs, were introduced. The key part of the legislation was to offer the option to defer required minimum distributions or RMDs at age 70½ to age 85 from qualified plans like 401(k)s. The rules of engagement allow deferring 25 percent of qualified plan monies not to exceed $125,000 per participant to age 85. QLACs use deferred income annuities that can guarantee income for life. Controlling RMDs with QLACs can have a significant impact on retirement taxation and may insulate a portion of Social Security income from taxation as well. Annuities are not insured by the FDIC or any government agency. So it’s important to have your financial advisor review the balance sheet and ratings of the insurance company before you purchase an annuity.