Retirement Security: a Discussion with Alicia H. Munnell

FEATURE | A Discussion with Alicia H. Munnell

RETIREMENT SECURITY A Discussion with Alicia H. Munnell

stage and what additional advice would you work-related expenses, no longer pay pay- provide retirees and those considering roll taxes, and—in most cases—have paid retirement? How does the seemingly per- off their mortgage. For this reason, finan- petual rock-bottom interest-rate environ- cial experts generally suggest that retirees ment change your response? need about 70−75 percent of their pre- retirement income to maintain their stan- Munnell: Decumulation is much harder dard of living after they stop working. than accumulation. People know how long they have to accumulate money, but they Alicia H. Munnell This drop in the required level of consump- do not know how long they have to draw tion is really unrelated to the price increases Alicia H. Munnell is the Peter F. Drucker down their retirement assets. I used to that retirees face on the goods and services Professor of Management Sciences at Boston worry that people would spend down their that they do consume. The traditional argu- College’s Carroll School of Management. She assets too quickly and run out of money. ment for a separate price index is that also serves as the director of the Center for More recently, I am more concerned about healthcare costs, on which the elderly Retirement Research at Boston College. She the opposite problem—that they will cling spend a disproportionate amount of their earned a BA from Wellesley College, an MA to their nest eggs and unduly restrict their budget, have been rising faster than other from Boston University, and a PhD from standard of living in retirement. goods. Recent evidence, however, shows Harvard University. that the overall Consumer Price Index for One way to solve this problem is to purchase the elderly (CPI-E) and the CPI for the I&WM: How do you define “retirement an annuity. Our favorite type of annuity is general population are very close, so I don’t security”? What are the key assumptions an advanced life deferred annuity (ALDA), view this discrepancy as a burning issue. underpinning that definition (e.g., longevity, whereby the individual purchases the product age of retirement, etc.) and is there advice at age 65 and the payments begin much later, I&WM: Is a checklist worthwhile when you would offer those saving for retirement? say age 85. This arrangement allows people to someone is considering retirement (or will consume all of their non-annuitized assets be retiring imminently)? If so, what are the Munnell: Retirement security is the between 65 and 85 because they know they biggest mistakes you think retirees make, ability for a household to maintain its pre- will have the annuity income kicking in once and could you provide a 10-point checklist retirement standard of living. The National they reach 85. In short, it protects them of items to consider? Retirement Risk Index, produced by the against outliving their resources and this pro- Center for Retirement Research at Boston tection is relatively inexpensive compared to Munnell: I would offer a three-point College, shows that half of households will fall an immediate annuity. checklist. The biggest decision is when to short of meeting this standard when they claim Social Security. Would-be retirees retire. This outcome assumes that they retire Rock-bottom interest rates increase the should ask themselves whether they could at 65 and that they annuitize all of their finan- importance of thinking about an annuity delay claiming Social Security until age 70, cial wealth plus the proceeds of a reverse because it is impossible to get much income when they receive their maximum monthly mortgage on their house. Thus, it is not a out of accumulated balances otherwise. benefit. They could either: (1) keep working “Chicken Little” exercise; the assumptions are until 70; or (2) retire earlier but delay optimistic in that people, on average, actually I&WM: It is often quoted that retiree spend- claiming Social Security until 70 by using retire before 65 and most do not annuitize ing needs drop dramatically in retirement. some of their 401(k) savings to support their financial assets or take a reverse mort- Is this a valid assumption? If so, why do you themselves. The second biggest issue is how gage. Hence, people need to save more, work profess the elderly need a separate price index? to draw down accumulated savings. The longer, and consider using their home equity. choice is either buying an annuity, again Munnell: Required resources do drop in preferably an ALDA, or using some rule of I&WM: How does the decumulation stage retirement because households no longer thumb. For a rule of thumb option, our of retirement differ from the accumulation have to save for retirement, have no more work has shown that the IRS Required

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Minimum Distribution rules are actually a care costs are high and rising and people counterparts who have a more generous fairly good guide to follow for drawing are living longer. Finally, for millennials, pension plan. down assets. The third issue is for house- student debt is an additional concern holds to consider their home as part of because it can delay when they begin saving I&WM: The Obama administration has pro- their retirement income portfolio. Tapping for retirement and when they buy a house. posed state-based retirement plans for the home equity—either through downsizing private sector that would not be subject to the or a reverse mortgage—is an important way I&WM: What impact could the large Employee Retirement Income Security Act of to increase monthly income. unfunded deficit for public sector plans 1974. What are your views on this offering? have on state/municipal workers and tax- I&WM: How is retirement for today’s payers? In what ways could the deficit Munnell: At any given point, about half boomers different from their parents who change how state workers think about of private sector workers are not covered preceded them, GenXers, or millennials retirement savings and what should by a retirement plan in their workplace. (with the overhang of student debt, etc.) our legislators be doing today to limit Therefore, covering the uncovered is a major who will follow in the future? those effects? priority and one that should be addressed at the federal level through a national auto- Munnell: Increasingly, people are retiring Munnell: In the aggregate, state and local matic individual retirement account pro- entirely dependent on 401(k) plans rather government pension plans have assets to gram. But, given the lack of action at the than on traditional defined benefit pen- cover about three quarters of their prom- federal level, the state initiatives are essential sions. These new arrangements mean that ised liabilities. Some plans have higher and should be encouraged. The Obama people have to worry about investment risk funding levels; others have lower levels. In administration’s attempt to clear away the and the potential of outliving their resources, the wake of the financial crisis, many regulatory underbrush should enable these risks that were borne by the employer in a states have reduced cost-of-living adjust- initiatives to move forward. defined benefit world. At the same time ments, raised employee and employer con- that today’s workers are facing a shift in tributions, and reduced benefits for new Acknowledgment the nature of employer-provided plans, employees. In the end, the core benefits Special thanks to I&WM editorial board they also will face declining Social Security for current workers and retirees are guar- members Judy Benson and Bruce Curwood replacement rates as the program’s “full anteed and will have to be paid by taxpay- for their thought-provoking questions. retirement age” continues its gradual ers. New hires with reduced benefits may increase from 65 to 67. In addition, health- well decide to save more than their older Contact Alicia Munnell at [email protected].

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