As boomers transition to retirement, many will be forced to finance their own healthcare and therefore need an income retirement plans. 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 set in the past, the two primary sources of retirement were pension plans and Social Security. However, the number of pension 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 pension 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) or RRSP plans, increased from 57.8% to 78.7%.
While income retirement plans are intended to provide guaranteed income for life, 401 and RRSP plans are intended to build wealth in an income retirement plan, 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, Roth IRAs and RRSPs than all other generations combined. While these accounts are intended to provide savings and wealth accumulation, they can be converted into income along with pension 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 in order to avoid a drop in standard of living during retirement. 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. In the past, financial advisors and baby boomers focused their efforts on wealth accumulation.