In a document entitled “The Fourth Pillar: Retirement Choices,” Prudential Financial asserts that Americans needed to add a category it called “Retirement Choices” to the traditional retirement security blueprint: Social Security, Employment-Based Plans and Personal Savings.
Specifically, Prudential suggests, choices are necessary regarding a variety of non-traditional retirement income sources such as: working in retirement, tapping into home equity, income protection, and wealth transfer considerations through products such as life insurance, long-term care insurance and longevity insurance.
Because of a variety of financial, demographic and other changes in recent years, Prudential says, “retirees will increasingly have to make choices such as whether and how to work in retirement, tap into home equity, and provide for the continuation of their retirement income for those who depend on them.”
The Prudential documents continue: “Hand in hand with these financial considerations are lifestyle choices, such as if and when to stop working, where to live, and how extravagantly or simply to spend leisure time. While these retirement choices are not new, they take on new significance in the face of the market trends that put increased pressure on the first three pillars.’
Support for a Fourth Retirement Savings ‘Pillar’
In support of their suggested change in analytical approach, Prudential researchers point out that:
- with the aging of the Baby Boom generation, more people will reach traditional retirement ages over the next two decades than at any other point in U.S. history, increasing pressure on the Social Security program as well as on employer funded retirement benefits.
- a person who reaches age 65 can expect to live, on average, another 18 years. Many, of course, will live longer. Life expectancy for women is about five years longer than for men.
- the trend for employers to move from defined benefit to defined contribution plans. DC account balances are largely insufficient to generate adequate retirement income. For 2005, the average 401(k) balance was $58,328 and the median was $19,398.
- the personal savings rate was -1% in 2006, reaching a historic low since the Great Depression.
- health care expenses have been increasing at two to five times the rate of inflation since 2000.
- many Boomers are not following the traditional retirement transition from full-time work to full-time leisure.
Finally, Prudential concludes: “Demographic, economic, and social trends are changing the nature of retirement in America, putting pressure on traditional sources of retirement income, and making individuals more personally responsible for their own financial security in retirement. While more and more retirees can look forward to long retirements, the retirement choices they make – both lifestyle and financial – will play an increasingly important role in their retirement well-being.’