Why American retirees are returning to work
A new study from the Employee Benefit Research Institute shows the rate of return to work among retirees in the United States.
I’ve saved up money, but how do I use it?
Millions of Americans are familiar with how to save in a 401(k) plan, from making regular contributions to securing a match with a company, but they don’t have a concrete plan to turn those savings into recurring income, a Nuveen and TIAA Research Institute survey of more than 2,100 workers found. On average, workers only answered about a quarter of survey questions correctly about withdrawing their retirement savings, and nearly half could not answer a single question correctly on the subject. Only 19% of people nearing retirement have even thought deeply about how to withdraw retirement income from their 401(k) savings.
The decision to withdraw is very important when retiring. Without a plan, experts say, retirees can run out of money or end up with excess funds on a tight budget, preventing them from enjoying their retirement to the fullest.
“With more than $8 trillion in assets spread across 725,000 plans serving 80 million active employees, 401(k) plans have become the primary retirement savings vehicle offered by employers in the private sector,” said Brendan McCarthy, president of Nuveen Retirement Investing. “But despite their size, too many Americans enter retirement without a clear strategy for turning their savings into ongoing income, and that gap has real consequences.”
How can Americans calculate how much they spend?
There are many general rules and tools you can use to ensure your retirement savings last. Some are:
- 4% rule: Withdraw 4% of your total retirement portfolio in the first year and then adjust that amount annually to account for inflation. Historically, under this rule, a stable income portfolio of stocks and bonds would last for about 30 years, assuming stable expenses.
- 4.7% rule: Latest version of the 4% rule. Some think this is outdated and too conservative. Critics of the 4% rule said it doesn’t take into account more diversified portfolios that include more than stocks and bonds, or the stock market, which has been booming in recent years.
- healthy life expectancy and lifespan: You can use a person’s life expectancy and healthy years, or healthy years, to determine how much they can spend. With a HIPAA (Health Insurance Portability and Accountability Act) release signed by our customers, Abacus Life can utilize your medical records to find potential people who match your health and medical history, provide you with the best possible life expectancy, and plan accordingly. People who are wary of signing up for access to their medical records can choose free online health tests like the American College of Certified Public Accountants and Abacus to find out how long they have to live.
Surya Kolli, director of the TIAA Institute, a think tank within the financial services company TIAA, said these guidelines are helpful but still leave retirees unsure whether their money will last as long as they need.
“Nearly half of 401(k) employees underestimate how much life they have left after age 65, and that misperception directly undermines their ability to plan for a sustainable income,” he said.
“People need assurance,” Corli said. “They shouldn’t be insecure. They need to feel confident that me and my spouse will be taken care of.”
What is an easy way to determine retirement income?
Given the difficulty 401(k) participants have in understanding retirement and estimating longevity, Corli said employers and retirement plan planners need to provide workers with more education and options to turn retirement savings into income.
Corli and his fellow researchers have found that an option that resonates with people nearing retirement is the ability to automatically convert 401(k) money into a type of annuity that provides lifelong income.
During the 2023 UAW contract negotiations at the Detroit Three automakers, striking workers demanded their pensions back. As most experts expected, they didn’t get it. Instead, they received the option to put some of their 401(k) savings into a low-cost annuity for a more predictable source of income in retirement.
“If you buy whole life insurance, you don’t have to calculate a withdrawal rate,” Corli says. “I always get paid.”
But he also acknowledged that he would not suddenly return to pensions in the future. “The future is probably going to be hybrid, adding some capital and lifetime income to the market,” he said.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
