In a new white paper, “Approaching the Decumulation Phase of Retirement,” Pentegra explores how retirees are spending their savings.
The paper suggests that retirees are very slow to draw down their assets, even when they are abundant. Lori Lucas, president and CEO of the Employee Benefit Research Institute (EBRI), says this is because retirees are worried about longevity risk, want to bequeath assets to heirs, and are also concerned about health care costs.
Pentegra finds that people who die at age 95 or older spend an average of $27,000 a year after age 70.
Nonetheless, according to a report by HealthView Services, retiree health care costs are expected to increase 5.47% a year for the foreseeable future, almost triple the average U.S. inflation rate of 1.9% between 2012 and 2016. The report further states that a 66-year-old couple retiring in 2017 would need 59% of their Social Security benefits to cover total retirement health care costs, while a 55-year-old couple would need 92%, and a 45-year-old couple, 122%.
Lucas says that retirees need to be educated on how much they can draw down.
PSCA also expects that the period of retirement for many workers will increase between 33% and 50% from an average of 12 to 15 years today to 15 to 30 years in the future.
PSCA recommends that retirees worried about longevity risk consider purchasing an annuity. “Lifetime income annuities provide a way to maximize retirement benefits to provide comfort and security throughout retirement,” PSCA says. “In effect, it delivers a guaranteed monthly income based on the retiree’s accumulated retirement benefits for as long as one lives, and, if the retiree so chooses, for as long as their beneficiary lives.”
PSCA says there are immediate annuities with payments starting within 12 months of the purchase date. They either pay a guaranteed monthly income for life or over a specific time period. A deferred income annuity pays income any time from several months to years after the purchase date, and payments from a qualified longevity annuity contract begin as late as age 85.
Penegra’s white paper can be downloaded here.