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Summary
Future retirees face declining defined benefit (DB) plans and increasing reliance on individual accounts like defined contribution (DC) plans and IRAs. This shift necessitates greater personal financial management to mitigate longevity risks and ensure adequate retirement income.
Area of Science:
- Economics
- Public Policy
- Retirement Planning
Background:
- Social Security's projected financial shortfall may reduce future benefits.
- A generational shift from defined benefit (DB) to defined contribution (DC) plans is occurring.
- Baby boomers are increasingly retiring with DC plans instead of traditional DB plans.
Purpose of the Study:
- To analyze changes in private pension plan participation (DB and DC plans).
- To quantify the increasing importance of individual account plans for retirement income.
- To discuss the risk of outliving assets due to non-guaranteed retirement income sources.
Main Methods:
- Utilized the Employee Benefit Research Institute's (EBRI) Retirement Income Projection Model.
- Compared results by gender for cohorts born between 1936 and 1964.
- Estimated the proportion of retirement wealth from DB plans versus DC plans and IRAs over three decades.
Main Results:
- A significant drop in the percentage of private retirement income from defined benefit plans (excluding cash balance plans) is projected for both males and females.
- Retirees will increasingly manage their own retirement assets, bearing investment risk.
- A larger portion of retirement income will come from individual accounts (DC plans, IRAs), requiring careful management to avoid outliving assets.
Conclusions:
- Future retirees face a greater responsibility for managing their retirement assets and investment risk.
- The shift towards individual accounts necessitates proactive financial planning and potentially annuity purchases to ensure income security.
- Longevity risk becomes a more central consideration in retirement expenditure decisions for individuals.