This Risk Awaits Boomers In Retirement; Here’s How To Avoid It


Editor’s Note: This article first appeared on

Baby boomers appear to be overestimating the length of their retirement savings – or perhaps underestimating the length of their lives.

According to recent research from Boston College’s Center for Retirement Research, baby boomers may be depleting their retirement savings faster than previous generations due to a lack of widespread access to pensions that older generations enjoyed.

CRR researchers used data from the University of Michigan’s Health and Retirement Study to find that the more annuitized resources retirees have, the slower they draw down their wealth.A financial adviser can assist you in determining how much retirement savings and income you will require once you retire.

Here’s how to stay safe.

Baby Boomers are at a higher risk of living to be 100 years old.

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Employers transitioned from defined benefit plans to defined contribution plans, causing a massive shift in retirement planning for baby boomers, the generation born between 1946 and 1964.While defined benefit (DB) or pension plans provide beneficiaries with a guaranteed income stream, defined contribution plans such as 401(k)s are typically less expensive and less complicated for employers, but they do not provide employees with the same level of security.

As a result, people born after 1960 have had limited access to pension plans, which have become increasingly scarce since the introduction of 401(k)s.CRR researchers discovered that the majority of households with heads born between 1920 and 1940 had access to a DB plan using data from the Health and Retirement Study.

CRRs Robert Siliciano and Gal Wettstein wrote that retirees with a DB had less need to draw down financial assets in their retirement accounts to cover their spending and could save these assets for late-life medical expenses or bequests.

Baby boomers may face a higher risk of outliving their retirement savings if they don’t have a pension. This is known as longevity risk.In fact, at the ages of 70, 75, and 80, Siliciano and Wettstein compared the drawdown speed of retirees with and without access to DB plans.Retirees with DB plans had lower drawdown rates at all three ages.

The researchers discovered that retirees with a starting net worth of $200,000 and access to a DB plan have $28,000 more in assets by the age of 70 than their counterparts.The household with a DB plan has drawn down 36 log points less of their initial wealth by age 75 and by age 80, corresponding to 86000 more wealth, according to Siliciano and Wettstein.

The researchers concluded that baby boomers who base their projections on previous generations’ drawdown rates are likely to underestimate the rate at which they will deplete their retirement savings.

How Social Security Can Help You Save For Retirement

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Early in their paper, Siliciano and Wettstein point out that retirees with higher proportions of annuitized wealth drew down their wealth at a slower rate than others.While annuitized resources include deferred compensation plans (DB plans), Social Security and commercial annuities also fit the bill.

Workers without pensions who are approaching retirement may consider delaying Social Security as long as possible in order to maximize their eventual benefits and inflate their only source of guaranteed income.

You must work for at least 35 years and reach full retirement age (67 for those born after 1960) to maximize your benefits.If you wait until after you reach full retirement age to file for Social Security, you will increase your overall benefit.

What Are Annuities and Other Alternatives?

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Commercial annuities can also replace the guaranteed income provided by pension plans, making them a popular investment option for some people.

You can exchange a lump sum or periodic payments for a future income stream using these financial contracts.However, if you don’t live long enough, you run the risk of not breaking.High fees and contract restrictions can both be deterrents.

Finally, retirees who want to make sure their savings don’t run out should carefully plan how much they can safely withdraw each year.

The most commonly quoted retirement rule of thumb states that if you withdraw 4% of your savings in your first year of retirement and adjust your withdrawals for inflation each year after that, your savings should last 30 years.

Your portfolio will be worth less than it would be otherwise if your first year of retirement coincides with a market downturn.Withdrawing money during a market downturn is known as a sequence of returns risk, and it means your returns will shrink and the size of your nest egg will shrink faster.

During market volatility, it’s critical to maintain flexibility and be able to adjust your withdrawal rate.When stock prices fall, having cash on hand can also help you avoid withdrawing too much from your portfolio.


Happy senior couple

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Because baby boomers have had less access to traditional pension plans, they are more likely to deplete their retirement savings faster than previous generations who had pensions.

Deferring Social Security and investing in an annuity while keeping a flexible withdrawal rate can help to reduce the risk of a drawdown.

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