"The Demographic Shift in the Diocese of Toronto"
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Retirement Income
As boomers transition to retirement, many will be forced to finance their own healthcare. And with these rising costs, a lifetime of savings could be wiped out with one serious illness unless preventative measures are put in place. Removing the Safety Net In the past, the two primary sources of retirement were defined-benefit (DB) pension plans and Social Security. However, the number of defined benefit plans has been declining because many employers terminate the plans early. Also, few new employers adopt these plans. According to the Employee Benefit Research Institute, from 1992 to 2001, the number of family heads participating in DB plans declined from 59.3% to only 38.4%. Meanwhile, over this same period, the number of family heads participating in defined contribution (DC) plans, such as 401(k) plans, increased from 57.8% to 78.7%. (To learn more about the loss of DB plans, see The Demise Of The Defined Benefit Plan.)
Lasting Income
So, what does this mean? While DB plans are intended to provide guaranteed income for life, DC plans are intended to build wealth for retirement, with no guaranteed source of retirement income. Thus, boomers (and their advisors) must learn how to convert savings into income that will last through retirement. The good news is boomers have contributed more to IRAs and Roth IRAs than all other generations combined. While these accounts are also intended to provide savings and wealth accumulation, they can be converted into income along with DC balances. The other source of income, Social Security, currently replaces only about 42% of income, which is substantially lower than the 70-80% replacement rate that many financial planners believe is required to avoid a drop in standard of living during retirement.
Pay-As-You-Go
The ever increasing drain on this pay-as-you-go system has created the real possibility that future Social Security benefits will replace an even smaller fraction of pre-retirement wages than they do today. Frighteningly, experts project that social security funds will be exhausted by 2040. The New Retirement Problem: Converting Savings into Income In the past, financial advisors and baby boomers focused their efforts on wealth accumulation.
1 "Boomers: Twisting The Retirement Mindset" (August 7, 2007 By David Rando, JD, CLU, ChFC)
Income that will last through retirement.
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