A new study lays out the reasons why workers could be headed to a rough retirement if something isn’t done to improve their situation. (Photo: Getty)

It’s no secret that not only are American workers afraid they won’t be able to retire, they don’t really “get” their retirement plans and don’t understand how to improve the situation.

And according to a study from the Stanford Center on Longevity, there are plenty of reasons for that.

The study from Stanford lays out the reasons that workers could be headed to a rough retirement if something isn’t done to improve the situation.

“How to ‘Pensionize’ Any IRA or 401(k) Plan,” a research project by consulting research scholar Steve Vernon at Stanford and the Society of Actuaries, points out that middle-income workers don’t think like investment managers or actuaries, and as a result many of their decisions regarding retirement preparation don’t bring them the results they want and need.

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Workers don’t save enough for their defined contribution plans to support them in retirement, with, according to the study, “roughly half of all older American workers (age 55+) hav[ing] less than $100,000 in retirement savings, not close to adequate for a traditional retirement of ‘not working…’” In addition, “Roughly one-fourth have between $100,000 and $500,000, and another one-fourth have more than $500,000.”

And considering that numerous other studies warn that a couple might have to fork over upwards of $240,000 just for medical expenses in retirement, it’s clearly obvious that most people are ill-prepared to pay their way through retirement.

But it doesn’t stop there, with savings—not that workers are even particularly good at keeping those savings intact.

The study points out that other research indicates that an estimated quarter of DC accounts have an outstanding loan or get raided for a hardship withdrawal or early withdrawal when the worker leaves a job.

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And then there’s the little matter of the need for regular retirement income, and how to generate it when few DC plans have the means to do so.

After all, defined benefit plans are all about regular monthly income, which is one reason their loss can be so devastating to the retirement picture in this country; ordinary employees don’t know how, or even if, they can turn their retirement savings into money that will keep coming in on a sustained basis—and that’s if they think about it at all.

The study points out that to get around these problems, employers “often suggest that workers consult a financial planner. But finding an adviser who is both skilled with retirement income planning and isn’t conflicted by how they’re paid can be a roadblock for workers. As a result, only about one-third of workers contact advisers for any purpose.”

And without having anyone to ask, it adds, only about half of older workers even try to figure out how much money they need to retire.

What passes for “planning” among most older workers is an attempt to estimate how much their monthly retirement income will be, and then try to cut their living expenses to that amount.

But since most workers haven’t a clue, or the skills, to transform savings into retirement income, what ends up happening is that retirees either try to use as little of their savings as possible, looking on the total as an emergency fund and keeping withdrawals to a bare minimum, or they just pay current living expenses out of their savings more as if it were a checking account instead of meant to last them for the rest of their lives.

Predictably enough, that can deplete their savings way before the end of their retirement.

They also tend to underestimate the length of time retirement is likely to last, so even when they try to figure out how much they’ll need they’re calculating for too short a period of time.

The study evaluated ways that workers could turn their savings into “pensions”—in other words, convert what they have into a regular monthly income.

While annuities seem one obvious choice, it highlights the fact that most older workers don’t think of an annuity purchase on their own—and most employers hesitate to offer them within a DC plan, in part because of fiduciary concerns.

So the study considered 292 different retirement income strategies, considering numerous factors including the age at which to claim Social Security; whether the purchase of an annuity would help, and if so, which type; and multiple other aspects of converting retirement savings into retirement income.

It then calculated how well each strategy performed in the face of “the many tradeoffs that older workers face when making retirement income decisions.”

Those tradeoffs include such dilemmas as maximizing lifetime income; having liquidity when necessary; planning for bequests; minimizing implementation complexity and costs; keeping income taxes to a minimum; and warding off common risks, such as longevity, inflation, investment, the death of a spouse, cognitive decline and mistakes, fraud and political/regulatory issues (including possible reduction of Social Security benefits or new or higher taxes on retirement benefits).

After all that, the study actually identified “a straightforward retirement strategy that can work for most middle-income retirees and be implemented in virtually any traditional IRA or 401(k) plan.” 

The report summarizes, “This strategy delays Social Security until age 70 for the primary wage-earner and uses the IRS required minimum distribution (RMD) to calculate income from savings.”

To learn more, see the study on the Stanford Longevity Center site