What the Research Can Tell us about Retiring


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What the Research Can Tell us about Retiring

It’s difficult to envision what life will look like on the other side of the consequential decision to retire.

But research can help demystify what lies ahead – about the decision itself, the financial challenges, and even the taxes. Readers understand this, as evidenced by the most popular blog posts in the first three months of the year.

Here are the highlights:

The retirement decision. The article, “Retirement Ages Geared to Life Expectancy,” attracted the most reader traffic. Myriad considerations go into a decision to retire. But a sense of whether one might live a long time – because of good health or simply seeing that parents or neighbors are living unusually long – is a compelling reason to postpone retirement either to remain active or to build up one’s finances to fund a longer retirement.

A recent study found that as men’s life spans have increased, they have responded by remaining in the labor force longer, especially in areas of the country with strong job markets and more opportunity. This is also true, though to a lesser extent, for working women.

The planning. The second most popular blog was, “Big Picture Helps with Retirement Finances.” It described the success researchers have had with an online tool they designed, which shows older workers the impact on their retirement income of various decisions. When participants in the experiment selected when to start Social Security or how to withdraw 401(k) funds, the tool estimated their total retirement income. If they changed their minds, the income estimate would change.

The tool isn’t sold commercially. But it’s encouraging that researchers are looking for real-world solutions to the financial planning problem, since the insights from experiments like these often make their way into the online tools that are available to everyone.

The taxes. It’s common for a worker’s income to drop after retiring. So the good news shouldn’t be surprising in a study highlighted in a recent blog, “How Much Will Your Retirement Taxes Be?” Four out of five retired households pay little or no federal and state income taxes, the researchers found. But taxes are an important consideration for retirees who have saved substantial sums. …Learn More

UK Pension Reforms Show Some Promise

woman in the UK on her phone

Unlike the United States, the United Kingdom has implemented bold reforms to its retirement system over the past decade.

Two of the biggest changes were gradual increases in the minimum age for collecting a pension under the national social security program and requiring private employers to automatically enroll their workers in an employee savings plan.

The goals of the reforms were to keep government spending in check and encourage individuals – who are living longer – to work longer, while helping them build up more private savings through employer-based plans. On balance, the notion is that workers will end up better prepared financially when they retire. Time will tell how successful these reforms will ultimately be.

But, so far, the results have been somewhat promising, concludes an Institute of Fiscal Studies report on workers’ changing expectations and attitudes about their retirement prospects.

In a major reform to private-sector plans, lawmakers started expanding coverage in 2012 by requiring that employers – the largest ones were first –  automatically enroll workers earning more than £10,000 (about $14,000) in a retirement savings plan. The total contributions to the plans must now be at least 8 percent of each worker’s earnings, with employers providing at least 3 percent.

This reform seems to have enhanced workers’ sense of financial security. In 2017, 78 percent said in a survey that they expect to get some retirement income from an employer savings plan – up from 63 percent in 2013. And while workers are permitted to opt out of the plans, they are doing so at consistently low rates.

On the retirement front, the minimum age to collect benefits under the U.K. social security system, the National Insurance Scheme, has risen dramatically for women. A decade ago, they could collect a pension at 60, but that had increased to 66 by last year. They are now in line with men, whose minimum age was 65 for many years and also rose to 66 last year. In the future, the increases are expected to continue: a 50-year-old worker would not be able to collect his pension until he is 68. …Learn More


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Big Picture Helps with Retirement Finances

The prospect of retiring opens a Pandora’s box of questions. But one big question dominates all the others: How will I manage my finances when I retire?

This is a vexing problem, and baby boomers could use some help thinking it through. To ease the process, a team at UCLA and Cornell University led by David Zimmerman, a UCLA doctoral student, created an online decision tool. In an experiment, they found that the tool might help future retirees understand how to smooth out their income over many years and make their savings last.

The results are preliminary, and the researchers are refining their analysis. But for the initial experiment, they recruited 400 people, ages 40 through 63. The participants were instructed to use the tool to make three big retirement decisions: starting Social Security, choosing a 401(k)-withdrawal strategy, and deciding whether to purchase an annuity. Their decisions would be on behalf of a 60-year-old who is single and plans to retire in two years. He earns $55,000 and has $250,000 in savings to work with.

The participants were split into two comparison groups. One group received immediate feedback on the impact of each separate decision. For example, when the participants picked a Social Security starting age for the hypothetical person, a chart showed a horizontal line tracking the fixed annual benefit locked in by that decision.

When they moved on to another page and selected a plan for 401(k) withdrawals, a chart showed the age when the savings would probably run out. The final decision was whether to buy a deferred annuity with some portion, or all, of the 401(k) assets. The chart on this page displayed the fixed income the annuity would generate every year for as long as the person lives.

The participants were encouraged to change their decisions as much as they liked to see how a change affected that particular source of income. But the researchers suspected that seeing each decision in isolation doesn’t help to clarify how various decisions work together to determine total retirement income over time.

So, the second group got to see the big picture. The chart in this case displayed the impact of any single decision on the annual income from all sources.Learn More


The Cares Act

Wisconsin Finds Owners of Lost Pensions

Some people lose old retirement accounts because they forget about them. Others don’t want the hassle required to retrieve small amounts. And workers who change jobs fairly often can leave a lot of small accounts in their wake.

As a result, millions of dollars of retirement wealth – in pensions, 401(k)s, IRAs, profit-sharing plans, and annuities – sit in state repositories of unclaimed property.

So how can workers and retirees be united with their long-lost money?

To answer this question, a new study contrasts what has happened to unclaimed retirement accounts in two states with vastly different approaches to handling them: Wisconsin and Massachusetts.

Wisconsin in 2015 began to use Social Security numbers to automatically match up and return misplaced retirement accounts to their owners. As long as the account has a Social Security number attached to it, the state can find a resident’s current contact information in Wisconsin’s taxpayer records.

Under this system, two-thirds of the accounts were returned in 2016 and 2017, the researchers found.

Over the same two years in Massachusetts, only 3.4 percent of unclaimed retirement accounts were returned to their owners. Massachusetts takes the same passive approach used in most states: individuals must initiate the process by locating an account in the state’s unclaimed property database and then retrieve it themselves.

The University of Wisconsin study also uncovered an explanation for why some people are motivated to track down accounts on their own. …Learn More


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Smaller Pensions Don’t Spur More Saving

Most state and local governments provide their employees with traditional pensions, which are nice to have. But not all pensions are equally generous.

The monthly benefits vary from one place to the next, and some governments have cut costs by reducing pensions for their newest hires. Further, one in four public-sector workers aren’t currently covered by Social Security, because their employers never joined the system.

A logical back-up plan for these workers would be to contribute money to the supplemental savings plans that most public-sector employers provide. When the workers retire, they can add the money saved in their accounts – a 401(k), 401(a), 457 or 403(b) – to their pension benefits.

But researchers at the Center for Retirement Research (CRR) find that workers are only slightly more likely to participate in a savings plan if they work for government employers with less generous pensions – a criterion based on how much of the worker’s current income will be replaced by the pension after they retire.

This lackluster response may not be surprising. Workers can see what’s deducted from their paychecks every week but don’t necessarily understand how these deductions – combined with their employer’s contributions – will translate to a pension.

Public-sector workers are probably more aware of whether their employers are part of the Social Security system. But apparently workers don’t consider that either. …Learn More


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Our Popular Blogs in the Year of COVID

2020 was a year like no other.

But despite the pandemic, most baby boomers’ finances emerged unscathed. The stock market rebounded smartly from its March nosedive. And the economy has improved, though it remains on shaky ground.

Our readers, having largely ridden out last spring’s disruptions, returned to a perennial issue of interest to them: retirement planning.

One of their favorite articles last year was “Unexpected Retirement Costs Can be Big.” So was “Changing Social Security: Who’s Affected,” which was about the toll that increasing the program’s earliest retirement age could take on blue-collar workers in physical jobs who don’t have the luxury of delaying retirement.

COVID-19 in the nation’s nursing homes has caused incomprehensible tragedy. A nursing home advocate explained how this happened in “How COVID-19 Spreads in Nursing Homes.” And the mounting death toll in nursing homes surely confirmed a longstanding preference among baby boomers – as documented in “Most Older Americans Age in their Homes.”

Despite the economy’s halting recovery, layoffs due to COVID-19 still “may be contributing to the jump in boomer retirements,” the Pew Research Center said. Pew estimates that 3.2 million more boomers retired last year than in 2019, far outpacing the increases in recent years.

The layoffs have no doubt forced some boomers to start their Social Security earlier than planned, as explained in “Social Security: Tapped more in Downturn” and “A Laid-off Boomer’s Retirement Plan 2.0.” But unemployed older workers who are still too young for retirement benefits might apply for disability insurance, according to a study described in “Disability Applications Spike in Recession.”

Baby boomers hoping to ease into retirement on their own terms liked a pair of articles about ongoing research by Harvard Business School professor Teresa Amabile: “Mapping Out a Fulfilling Retirement” and “Retirement is Liberating – and Hard Work.”

Other 2020 articles popular with our readers included: …Learn More


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How Much Will Your Retirement Taxes Be?

Four out of five retired households will pay little or no income taxes. But the tax rates at the highest income levels are meaningful, averaging 11 percent of household income and as much as 23 percent at the very top.

These estimates come from a new analysis by the Center for Retirement Research that sheds light on a potentially important consideration that is often overlooked by people approaching retirement age.

The highest tax rates are paid by the highest-income households because they often withdraw money from 401(k)s and IRAs to supplement their Social Security benefits. They must also pay capital gains taxes when they sell stocks and bonds for a profit from their regular financial accounts.

Retirement Taxes ChartHouseholds with income in the top 20 percent have nearly $770,000, on average, in retirement savings and other financial assets – their taxes equal 11 percent of their total retirement income. However, limiting the households to the top 5 percent of the income distribution, the tax rate increases to 16 percent – and the top 1 percent pays 23 percent.

These estimates assume retirees start pulling money out of their taxable 401(k) and IRA accounts when the IRS’ required minimum distributions (RMDs) kick in at age 70 1/2 – this age will increase to 72 next year. The tax rates were very similar under alternate scenarios that assume retirees either start withdrawing savings prior to the RMD or buy an immediate annuity with a survivor’s benefit.

The tax estimates are based on data for older U.S. households with at least one recent retiree. The researchers first calculated their expected future lifetime income from Social Security, 401(k)s and other sources in each year. The future yearly tax payments were then estimated using a program that applies IRS rules and each state’s tax rules to the various types of retirement income.

The tax rates are their total tax bills as a percentage of their total income. …Learn More

 


Originally posted at https://squaredawayblog.bc.edu/tag/401k/

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