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Shifting Retirement Income Landscape in U.S.

picture of Gary Curnutt

Gary Curnutt

Significant shifts in the retirement income environment across the nation intensified by the global COVID-19 pandemic are leading to increasing concerns among Americans about whether they will have sufficient funds to meet their needs during their golden years.

That is among the findings of a recent study conducted by Gary Curnutt, assistant professor of finance in the College of Business at Western Carolina University, and Qi Sun, a financial economist with the Pacific Life insurance company.

Curnutt and Sun are co-authors of a paper titled "Sustaining Retirement During Lockdown: Annuitized Income and Older American’s Financial Well-Being Before and During the COVID-19 Pandemic,” which has been accepted for publication by the Journal of Risk and Financial Management.

Their study examines the dramatically changing landscape of employer-sponsored retirement plans in the U.S. as larger numbers of private-sector employers have moved away from traditional “defined benefit” plans that provide a specific monthly pension payment to retirees and toward “defined contribution” plans with payments based on a combination of employer and employee contributions.

For the study, Curnutt and Qi used data from the Health and Retirement Study, a longitudinal panel conducted by the University of Michigan that provides a nationally representative sample of approximately 20,000 respondents from across the U.S. Using data from 2016 and 2020, the researchers used four separate logistic models to evaluate the relationship between measures of both objective and subjective financial wellbeing and annuitized income during the COVID pandemic and recession.

“Think of a defined benefits plan as a retirement package that promises you a specific amount of money every month after you retire. The amount is determined by factors such as how many years you've worked for the company and your salary. Essentially, your employer is saying, ‘When you retire, we’ll make sure you receive a set amount of money each month,’” Curnutt said.

Defined benefits plans provide a source of annuitized income and, in addition to a traditional pension plan, can take the form of annuities and similar financial places.

“Annuitized income is having a reliable source of money that comes in on a regular basis, similar to receiving a paycheck when you were working,” Curnutt said. “It's designed to ensure you have a steady income even after you retire, making it easier to budget and cover your living expenses.”

Conversely, a defined contributions plan is akin to a savings account for retirement, where employees and often their employers regularly put money into an account, he said.

“This money is invested in things like stocks, bonds or other assets. Over time, your contributions and the returns from these investments grow. When you retire, you can access this accumulated amount, which is often used to fund your retirement lifestyle,” Curnutt said. “It’s like gradually building a financial nest egg for the future, based on your ongoing contributions and the growth of your investments.”

While defined benefit plans once were fairly common among private-sector employers, that has changed over the past several years as employers have decided to freeze or event terminate traditional pension plans. These shifts have fundamentally altered how individuals approaching retirement should be planning plan for their financial future, Curnutt said.

“The traditional model of defined benefit pension plans is fading, placing the onus on individuals to manage their retirement savings through defined contribution plans such as 401(k)s. This transition underscores the need for a proactive approach to savings and prudent investment strategies to secure a comfortable retirement,” he said.

In addition, growing awareness of longevity risk – that is, the possibility of retirees outliving their retirement benefits – calls for careful consideration of health care costs, insurance planning and budgeting to account for a longer retirement span.

Curnutt and Qi encourage individuals – and their financial advisers – to develop a better understanding of the importance of the benefits and drawbacks of annuitized income in retirement planning and to stay informed about ever-changing Social Security rules and tax implications on retirement income.

“The defined contribution plans has become the primary choice or the only choice for employees to participate in employer-sponsored retirement plans,” Curnutt said. “In the next 10 to 20 years, hundreds of millions of defined contribution plan participants will retire without annuitized lifetime income from pension plans to protect against longevity risk. It is important for research to provide evidence on how the change in retirement income resources affects retirees’ retirement security and financial wellness.”

Through their recent study, Curnutt and Sun are taking what they see as an important early step in providing that evidence.

“The key findings of this study underscore the significance of maintaining a consistent stream of annuitized income to enhance retirees’ financial well-being, particularly their perceived financial satisfaction. With the shift from defined benefit to defined contribution retirement plans, individuals are growing more concerned about depleting their funds during retirement, leading to a decline in their overall retirement contentment,” he said.

In additional, their research explores the moderating role of annuitized income and its potential ability to bolster the subjective financial well-being of retirees who are experiencing challenges in both mental and physical health.

Curnutt and Qi also found that the COVID-19 pandemic had a significant impact on the retirement income landscape.

“Market volatility, driven by economic uncertainty, affected retirement savings, underscoring the necessity of diversified and resilient investment strategies. Job losses and financial instability led to challenges in saving for retirement, and some individuals tapped into their retirement funds prematurely,” Curnutt said

“While lower interest rates affected fixed income investments and retirement income, we also saw an increase in forced or early retirements as older workers, who may have been more susceptible to the health effects of COVID-19, dropped out of the labor market. And many of them haven’t returned,” he said.

For those planning to retire in the next few years and the financial professionals assisting them, the study by Curnutt and Qi suggests that securing a steady lifetime income stream can be useful for reducing financial stress and improving overall financial well-being.

“Particularly, annuitized income demonstrates a positive impact, especially on subjective financial well-being, and particularly for those with health challenges. The study underscores the importance of diversifying future retirement income sources and emphasizes that financial advisers should prioritize this approach, not solely focusing on asset accumulation,” Curnutt said.

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