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401(k) plans may not last long enough in retirement

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Older Americans may have a number of different goals with their retirement savings. But usually their main goal is the same: to make it last.

Unfortunately, many baby boomers and members of the next generation don’t have access to a traditional pension that could outlive the money in their 401(k) account, a research from the Center for Retirement Research at Boston College found.

The economists compared withdrawal rates between people with traditional pensions and those with only 401(k) savings accounts. While most research on the longevity of retirees’ money is based on the former, the majority of people today fall into the latter category.

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“What most people have a chance to observe are people with traditional pensions,” Gal WettsteinA senior research economist at the Center for Retirement Research at Boston University, points out that 401(k) workplace retirement plans only became popular in the 1980s.

Analysis of pensioners with pensions shows that they often don’t spend their savings. In fact, many people have seen their nests continue to grow after they stopped working.

“This optimistic idea of ​​the past can give a false sense of security,” says Wettstein.

People who retire with 401(k)s are often quick to spend their savings

Access to traditional pensions has been rare for decades now. Workers are increasingly tasked with saving themselves for their later years into investment accounts, poster children are 401(k) plans offered through employers.

The researchers found that these plans ran out much faster than expected.

One example in the analysis looked at retired households with $200,000 in savings. By their analysis, by age 70, retirees with a 401(k) plan but no pension will be $28,000 less than retirees with a pension – a difference that accounts for 1/ those 8 initial balances. By age 75, 401(k) savers have $86,000 less than those who already have a pension.

“People spend a large portion of what they have when they have a 401(k), says Wettstein.

The quick withdrawal of savings in a 401(k) account means that many retirees who depend on them could be at risk of running out of their money entirely by the age of 85, the study says, although about one half of them will live after that point, the study said.

While they’ll still receive a monthly Social Security check, Wettstein says, “that’s usually not a sufficient substitute for their career-level income.”

Pensions help solve ‘how much can you afford’ problem

Given the relatively new nature of 401(k) plans, more is still needed to know about why retirees spend down the account so quickly, Wettstein said.

However, several reasons can be assumed. Those with a traditional pension, which guarantees a fixed monthly payment until death, may need to switch to less savings because of that reliable income. They may have been able to keep their savings for inheritance purposes or in the event of unexpected expenses incurring later in life.

We did this as a first look at whether we should worry.

Gal Wettstein

a senior research economist at the Center for Retirement Studies at Boston College

On the other hand, many retirees without a pension have to rely on their own nests to cover most of their monthly expenses. Without a pension, people also have a responsibility to make sure they have saved enough to get through their post-work years, a task that requires decades of adequate income and discipline.

Also, a challenge with 401(k) savings plans is that they charge retirees having to figure out how much to withdraw each month. This calculation can be difficult to succeed, and although people with substantial savings aim to live off their hard-earned money, markets are unpredictable and there are periods – such as right now – in places where needs more than what it gives.

“One of the advantages of the pension system is that it assures you that you can afford to spend it, in fact, it will never run out, and in an advisory sense, as it says, ‘ Here, you can spend as much because next month you’ll get the same amount again,'” Wettstein said. “A 401(k) doesn’t give you that.”

Wettstein stresses that it’s still early to get the full picture of how successful a 401(k) account is for people long after retirement.

“But we did this as a first look at whether we should be worried,” he said. “And the conclusion we came to was, yes, we should.”

This article was written with the support of journalism fellowships from the American Geriatric Association, Generations Journalists Network, and the Silver Century Foundation..

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