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Older Americans may have a number of different goals with their retirement savings. But usually their main goal is the same: to make it last.
Unfortunately, many baby-boomers and members of later generations who don’t have access to a traditional pension can live off the money in their 401(k) accounts, according to a recent study from the Retirement Research Center at Boston College.
Economists have compared decline speeds between those with traditional pensions and those with only 401(k) savings accounts. Although most research on how long retiree money lasts is based on the former, the majority of people now fall into the latter.
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“What most people have had the opportunity to notice are people with traditional pensions,” said Gal Wechstein, chief economic researcher at the Center for Retirement Research at Boston College, noting that 401(k) workplace retirement plans are becoming more widespread. in the eighties.
Those analyzes based on retirees with pensions found that they often did not spend their savings at all. In fact, many have seen their nest eggs continue to grow after they stop working.
“This optimistic notion from the past may give a false sense of security,” Whitstein said.
Retirees with 401(k)s often spend savings quickly
Access to traditional pensions has been scarce decades now. Workers have increasingly been mandated to save for their later years themselves in investment accounts, of which the poster child is a 401(k) plan offered through employers.
The researchers found that these plans wind up much faster than expected.
One example in the analysis looked at families entering retirement with $200,000 in savings. By age 70, retirees with a 401(k) plan but no pension were $28,000 less than retirees with a pension, according to their analysis — a difference equal to one-eighth of that starting balance. At age 75, 401(k) savers had $86,000 less than those with a retirement pension.
“People spend a big share of what they have when they have a 401(k),” Whitstein said.
A rapid withdrawal of savings into 401(k) accounts means that many dependent retirees may be at risk of fully depleting their money by age 85, although about half will survive after that time, the study said.
Wettstein said that although they will still receive their monthly Social Security checks, “this is not usually a sufficient substitute for their career-wide earnings.”
Pensions Helped ‘How Much You Can Afford’
Wettstein said that because of the relatively new nature of 401(k) plans, more remains to be learned about why retirees are spending on accounts so quickly.
However, some reasons can be assumed. Those with a traditional pension, which guarantees a fixed payment each month until death, are likely to need to reduce their savings because of this reliable income. Perhaps they were able to keep their savings for inheritance purposes or in case of unexpected costs later in life.
We did this as a first look at whether we should be concerned.
Gal Westen
Chief Economist at the Center for Retirement Research at Boston College
On the other hand, many retirees who do not have a pension depend on their nest egg to cover a significant portion of their monthly expenses. Without a pension, people are also responsible for making sure they save enough to get them done through their post-working years, a task that requires decades of adequate earnings and discipline.
Additionally, the challenge with 401(k) savings plans is that they charge retirees a fee for figuring out how much to withdraw each month. It can be difficult to get into this account properly, and although those with big savings aim to live off their financial earnings, the market is unpredictable and has periods – like now – where it takes more than it gives.
“One of the advantages of the pension system was that it reassured you of how much you could spend, practically, because it would never run out, and from an advice perspective as well, because it says, ‘Here, you can spend that much, because next month, you’re going to get the same amount again. “A 401(k) does not give you that.”
Wettstein emphasized that it’s still too early to get a complete picture of how well 401(k) accounts keep people in retirement.
“But we did it as a first look at whether we should be concerned,” he said. “And our conclusion is, yes, we should.”
This article was written with support from the Journalism Fellowship of the American Aging Association, the Journalists’ Network for Generations and the Silver Century Foundation..