Is retirement really a gilded life at the end of a rainbow of work?
Not necessarily, says a new research paper from the National Institute on Retirement Security (NIRS) in the U.S., titled The Growing Burden of Retirement . The paper warns that unexpected costs may prove daunting when we’ve reached the after-work stage of life.
Save with SPP reached out to Tyler Bond, one of the authors of the NIRS report, to find out what else the research discovered.
“A lot of people still go into (retirement) with the `golden years’ in mind; they are going to live off their nest egg, travel, they now qualify for Medicare, and they’ll visit their grandkids,” he explains.
But near retirees should also be thinking about any debt they may be carrying into retirement, such as mortgages. “If you own your home, is it paid for?” he asks. “Do you have any health concerns that might cause you to need long-term care? For me, the most important finding of this report is for people to see there is a wide range of outcomes in retirement,” he tells Save with SPP.
As in Canada, “the lack of (retirement) savings has been a problem in the U.S. for a long time,” says Bond. “Fifty per cent of working Americans don’t have access to a retirement savings plan at work, and all the data points to the fact that people are significantly more likely to save for retirement via a plan at work.”
Bond believes “improving access to workplace retirement plans is an essential first step.”
South of the border, 12 states have taken this bull by the horns and have started their own pension plans for those without workplace pensions. These “state-facilitated retirement savings plans” are being rolled out in California, Illinois and Oregon, Bond says, and Colorado and Pennsylvania are expected to follow suit shortly.
Employers set up their employees for automatic payroll contributions, but the employers don’t contribute. The state plans feature “auto-enrolment,” meaning employees get signed up automatically with a right to opt out if they want. Other features include “auto-escalation” of contributions, Bond explains. Most plans start with a five per cent contribution which is gradually ramped up over time to eight or 10 per cent, he explains.
Another great feature liberates people from the tricky decision of choosing what to invest their money in. Most plans place the first thousand dollars in a money market fund and then switch it over to a target-dated fund.
And the plans help turn the savings into retirement income, the “decumulation” phase. “There will be help with decumulation,” Bond says. “The idea is to come up with some way to annuitize the savings,” converting the saved dollars to a lifetime income stream, he explains.
“All these automatic features make it easier for people, easier for them to save, so we are hopeful (the state plans) will adopt these features,” he explains. There has been talk of launching a national version of these “auto-IRA (individual retirement account)” plans, Bond adds.
The new plans are reminiscent of older defined benefit (DB) plans that were “dominant” in the U.S. years ago. Those plans had similar “easy” enrolment and contribution, and looked after investment and decumulation too.
“In the last 30-40 years, defined contribution (DC) plans have dominated in the private sector,” Bond explains. But these plans didn’t all feature contribution increases and don’t always help with the drawdown, retirement income stage. “Over the next decade we will probably see more innovation in the DC space,” says Bond.
Making savings easier is part of the solution, but so is understanding the retirement spending side, Bond explains. “That’s definitely part of it,” he agrees. People “don’t know how to spend their money over the course of a long retirement – the rest of their lives – and all the challenges associated with it.”
“You don’t know how long you’re going to live – 20, 25 years? More? Will you need long-term care, or will your spouse? There’s an assortment of challenges whenever you get to retirement.”
These are issues “that don’t get talked about much,” he says. “Retirement income and retirement costs are not brought together a lot.” The number of Americans carrying mortgage debt into retirement “has significantly increased” over the past decades, and those who are renting are also experiencing cost increases.
Long-term care in the U.S., as in Canada, is very costly. While some citizens qualify for lower-cost long-term care if they qualify for Medicaid (a program for people with low incomes and savings), the rest have to pay many thousands per month for care.
While long-term care insurance exists, it is expensive – mainly because those buying it tend to be those most likely to need it. One state – Washington – is looking at a “social insurance model” for long term care, a state-run program that would help citizens with long-term care costs. Citizens would contribute 58 cents on every $100 of earnings towards this program, he explains. “A social insurance model (for long-term care coverage) is the best way to go… a system where everyone pays a little bit, versus private insurance.”
We thank Tyler Bond for taking the time to speak with us.
If you don’t have a workplace pension plan – or you want to supplement the plan you have – the Saskatchewan Pension Plan may be the program for you. SPP is defined contribution plan. You can contribute up to $6,300 a year (indexed annually) towards your future pension; SPP will look after your investments and will convert your savings to income once you’ve reached retirement age. Employers are able to offer SPP as a workplace pension. Why not check SPP out today?
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.