Vanguard: Turning savings into stable retirement income is a common hurdle

The report noted that more than 4 million Americans will be turning 65 this year. And while the long-term trend of baby boomers reaching the common age of retirement is peaking, members of Generation X — who are now entering their 60s — will begin turning more frequently to retirement funds in the next few years.

“Turning savings into income is one of the most important and complex steps in retirement planning,” Lauren Valente, managing director of Vanguard Workplace Solutions, said in a statement. “That’s why we’re proud to launch How America Retires and provide a roadmap for building resilient, income-generating strategies that support retirees throughout the next phase of their lives.”

More than 100 million Americans are covered by defined contribution plans, with an aggregate value of $12 trillion in assets, according to Vanguard’s analysis of data from the U.S. Department of Labor and the Investment Company Institute.

These plans now comprise most retirement account options through private employers, with only 15% of private companies still offering defined benefit plans like pensions.

But while a 401(k) or 403(b) is a “portable” financial option that allows workers to continue saving if they switch employers, the ability to convert these funds into an effective income stream in retirement often proves to be a challenge.

“As plan sponsors continue to improve the accumulation phase of retirement saving, uncertainty remains over the best way to help participants decumulate their savings during retirement,” the report explained.

“While automatic saving and investing solutions are incredibly effective in helping participants prepare for retirement, it’s challenging to envision an ‘automatic income solution’ that will serve a broad and diverse retiree population — given the individuality and personalization of every participant’s retirement needs.”

Among the key findings of the report, Vanguard noted that plan design matters as those with “flexible distribution options are 30% more like to remain in-plan and significantly less likely to cash out their balances in the first year” of retirement.

Additionally, more than 50% of retirement plan participants remain in employer-sponsored plans for at least a year after retirement, and 75% of this group preserves their assets for at least three years after retirement. The participants who cash out typically hold balances below $7,000.

Whether a participant is rolling over their savings to an IRA or other long-term savings vehicle, or sticking with their company plan, they tend to have higher balances and a greater need for “tailored income solutions,” Vanguard said.

The analysis found that roughly 30% of retirees have either overly aggressive or overly conservative exposure to market equity, mean that they could benefit from support to redesign their investment portfolio.

Vanguard went on to highlight “emerging retirement income solutions” like annuity target-date funds, installment payment options and greater access to financial wellness tools. These options can help a consumer address the risks of outliving their savings in retirement and the potential losses caused by financial market volatility.

The report also touched on strategies for when to claim Social Security benefits. It noted that for most workers born in 1960 or later, claiming benefits at age 62% reduces the typical payment by 30%, while waiting until age 70% to make claims increases the typical benefit by 24%.

Workers who save 12% to 15% of their annual income in an “age-appropriate, well-diversified portfolio” over the course of 35 years and combine it with Social Security benefits should have about 75% of their pre-retirement income once they exit the workforce, according to the report.