The times they are a changing and so is the face of retirement, part one of five taken from the full episode of Right on the Money On The Basics of Annuities.
In 1964, Bob Dylan wrote a prophetic tune, The Times They Are A Changin’. Back then, a retiree had a pension, no mortgage and full Social Security benefits. The children of the ’60s are now in their 60s. But the baby boomers fund their own retirement plans and carry mortgages into their golden years. Over the years, they have also watched Congress tinker with their Social Security benefits.
Through the last generation, employers have migrated from defined benefit to defined contribution plans. From 1985 to 2000, the rate of participation in defined benefit plans by full-time employees of medium and large private firms dropped from 80 percent to 36 percent.1 A 2013 survey by the Bureau of Labor Statistics found only 26 percent of civilian workers in the U.S. participated in defined benefit pension plans.2
The boomer generation is often referred to as the “sandwich generation,” because they are paying for their parents’ elder care as well as the tuition of their children. When you add the funding of their retirement plan, there’s not much money left to pay off a mortgage. Presidential candidates have promised Social Security will not be altered for baby boomers, but Congress has changed things over the years. With the most recent changes coming with the passing of the Bipartisan Budget Act of 2015, some baby boomers lost the “file and suspend” and restrictive application benefits. But perhaps the biggest change and the greatest risk is living longer—much longer.
Today, the average life expectancy for men is 86.6 years and for women 88.8.3 The impact of longevity on retirement modeling has created an environment of among seniors of outliving their money. But to offset some of that fear, the strategic use of lifetime annuities has been introduced into retirement planning. Watch the interview with Certified Annuity Specialist Liz Cornell [url link].
Annuities can be structured to pay guaranteed lifetime income with annual increases. Today, more retirement plans are using guaranteed lifetime annuity income to pay for household living and travel expenses. The structured payout can cover two lives and provide income for the survivor.
Two years ago, Qualified Longevity Annuity Contracts (QLACs), which use deferred income annuities, were introduced. The key part of the legislation was to offer the option to defer required minimum distributions (RMDs) from qualified plans like 401(k)s. The rules of engagement allow deferring 25 percent of qualified plan monies not to exceed $125,000 per participant to age 85. Controlling RMDs with QLACs can have a significant impact on retirement taxation and may insulate a portion of Social Security income from taxation too.
Annuities are not insured by the FDIC or any government agency. So it’s important to have your financial advisor review the balance sheet and ratings of the insurance company before you purchase an annuity.
1 See, “Employee Participation in Defined Benefit and Defined Contribution Plans, 1985-2000.” U.S. Bureau of Labor
Statistics, updated June 16, 2004.
2 National Compensation Survey: Employee Benefits in the United States, March 2013, Table 2.
3 Changes in life expectancy for 65-year olds in the U.S. 2010 vs. 2014 Wall Street Journal 10/28/2014.
Syndicated financial columnist and talk show Steve Savant interviews Liz Cornell, Certified Annuity Specialist on The Basics of Annuities