To a large degree, the retirement security issues we face both as a nation and as individuals can be laid at the feet of medical science. Our longer lives, a blessing in so many ways, are a big reason that government pension plans and individual saving schemes are coming up short. We were slow to spot the trend, and then to act.
So it’s encouraging to note that individuals seem to be coming to grips with the financial strain caused by the longevity revolution. Nearly two-thirds of pre-retirees now say that the odds of living a long life is their number one financial risk, according to the 2011 MetLife Retirement Income IQ survey.
That recognition rate is a vast improvement over earlier surveys. In 2003, MetLife found that just 23% of pre-retirees identified their potential longevity as a top issue.
In 1900, life expectancy at birth was 47. Today it is 76, and if you are already 65 you should make it to 85. Government and private employers have known for decades that longer lives were helping sink the pension system. That’s why Social Security has been systematically downplayed as a primary income source and private companies have shifted away from defined-benefit pension plans to defined-contribution plans.
Individuals have been slower to grasp the impact of their longer lives on their ability to retire in style. So, the MetLife survey suggests that an important corner has been turned. We finally get it, and that’s great news because we must understand a problem before we can do anything about it.
So what are we doing about it? Interest in things like fixed annuities, reverse mortgages and other lifetime income products has taken off in recent years. Nearly nine in 10 in the MetLife survey said they have taken steps to secure retirement income; 62% said they have sought professional advice.
Yet we still have a ways to go. In the survey, 40% said they believe they could sustain a drawdown rate of their retirement assets equal to 7% or more a year. Most advisers say the right drawdown pace is 4% in year one with annual increases for inflation. At that rate, your retirement pool should last 30 years.
The aggressive drawdown rates noted in the survey point up a lingering important shortfall in retirement thinking. Even though most folks now understand they will live longer and must plan for it, they evidently do not realize just how much longer; many will see 85 or 90 or even 95. We’ll have to take this one step at a time.