Work Longer Or Save More: Which Will It Be?

By Linda Koco

Most U.S. workers will likely stay on the job longer so they will have enough money to maintain their standard of living in retirement — unless changes can be made. Those changes could include the use of annuities.

That’s what researchers at Aon Hewitt found when analyzing retirement prospects for employees at 77 large U.S. employers.

The average worker will need to save 11 times their final pay at retirement (age 65) to keep their pre-retirement lifestyle, according to a new Aon Hewitt study.

It’s widespread

Other researchers have arrived at somewhat similar conclusions. However, this study covers 2.1 million workers, so the findings suggest the trend is widespread, at least among workers at large employers.

Aon Hewitt projects that age 68 is the median age at which U.S. workers will be able to retire with sound financial security. But that’s the median. Many won’t get there. In fact, that, even at age 75, roughly 16 percent or workers will still not have enough to retire, the researchers said.

If there is a ray of light to be found, it is that 20 percent of workers are likely to have enough resources to keep or exceed their pre-retirement lifestyle, according to the study. An additional 20 percent may be “reasonably close” albeit with some lifestyle adjustments.

However, this still leaves 60 percent of workers unable to afford to retire at age 65, Aon Hewitt said.

Employees can improve their prospects if they use automatic savings features when contributing to their defined contributions (DC) plans at work, the researchers said. For instance, they project that more than 70 percent of full-career contributors to DC plans will have near-adequate resources at age 65 if they elect to automatically escalate the percentage of pay they contribute to their plan.

Starting to save early in the working years helps too. But this won’t happen without giving up something. On average, Aon Hewitt said, employees need to add 17 percent of each year’s pay to their retirement resources from age 25 to 65 in order to reach their target. (The resources include employee savings and employer benefits.)

Those who save less, start later or don’t invest appropriately may need to contribute more in future years to make up for the shortfall, the researchers cautioned.

Planning is not a priority

But retirement planning, let alone actual saving, is not top of mind for a lot of employees, according to findings in a separate Aon Hewitt survey.

The earlier study found that only 40 percent of workers have created a financial plan. In addition, only 54 percent have estimated their retirement needs, determined their savings requirements or forecasted how much income they'll need in retirement.

This means that at least half of the workforce has likely not taken any of these retirement readiness steps.

To create a secure retirement, the most important thing that American workers can do is to “establish goals for the kind of retirement they want and determine a savings plan to meet those needs and desires,” Rob Reiskytl, a partner at Aon Hewitt, said in releasing the new report.

“This might mean starting to save more now, delaying retirement by a few years or making a conscious choice to retire with a lower living standard."

Annuities

So where do annuities come into the picture?

According to Aon’s report summary, employees generally have several alternatives to help ensure the money they do have will last through retirement.

One of them is “buying an annuity to assure a steady income for life,” the researcher wrote. Presumably that would be via annuitization, purchase of an income annuity or electing a guaranteed income option that may be available in existing products and plans.

Another is “buying a deferred annuity to provide longevity protection while maintaining the flexibility of having cash on hand during the first 20 years of retirement.” This could be an increasingly feasible option now that qualifying longevity annuity contracts (QLACs) are approved for use inside of defined contribution plans such as 401(k)s and in individual retirement accounts. Several longevity annuities also are available now in the retail market.

Of course, if workers do not save, or don’t save very much, they will not have many assets to put into annuities, whether inside a DC plan or in the retail market.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.