More people are turning 65 this year than ever before. That has sparked a gold rush for the retirement industry

More people are turning 65 this year than ever before. That has sparked a gold rush for the retirement industry

More Americans are turning 65 this year than ever before, and that number is expected to rise even higher in the coming years. It’s driving a big rollout of new retirement products – but they’re not all golden tickets.

An average of 11,200 Americans will reach that traditional retirement age each day in 2024, according to a recent report by the Alliance for Lifetime Income.

This surge, along with new laws that came into effect recently, has led to a growing number of financial products that promise a lifetime salary, no matter how long you live. But some choices are hard to reverse and, since some plans are so new, their benefits and drawbacks have not been thoroughly researched.

From pensions to 401(k) plans.
Although she plans to stop working in about a decade, Jennifer Messina, a 51-year-old administrative assistant in Nutley, New Jersey, said she’s not worried about retirement because her husband’s job provides them with a union-sponsored annuity (insurance). products that pay income) and pension plans.

With a defined benefit pension, the burden of saving and investing for retirement falls on the employer, not the employee. These plans typically offer lifetime employee benefits, depending on the person’s salary and how long they’ve been with the company.

“I was really lucky,” Messina said. “We didn’t save much of anything.”

However, jobs that offer pension plans are harder to come by than in previous decades. Over the past 40 years, defined contribution plans, also known as 401(k) plans, have replaced them. Americans now hold more than $7 trillion in 401(k) plans, according to data from the Investment Company Institute, a trade association.

This type of retirement plan puts the onus of saving and investing on the employee. With a 401(k) plan, it’s up to the retiree to make sure they don’t run out of money. Many people are unable to save enough for retirement, potentially leaving them heavily dependent on the Social Security benefits they accrued in their working years – and those benefits are not substantial. The average retiree’s monthly check this year was $1,915, according to the Social Security Administration. Even retirees with the highest earnings during their careers earned between $2,710 and $4,873 depending on their age when they retired.

In addition, millions of workers do not have access to workplace savings plans or do not participate if they do. Nearly 50% of people don’t have any money saved in a retirement account, according to Federal Reserve data from 2022.

“It’s structurally flawed,” Teresa Ghilarducci, a labor economist and professor at The New School for Social Research, said of the 401(k) system.

Financial companies jumped in to fill the void
However, this year has brought some changes to employer-sponsored plans. The new law, known as Secure Act 2.0, allows companies to offer their employees access to lifetime annuity products in their 401(k)s.

Enter a financial company offering a new investment that echoes the promise of a traditional pension: a salary you can count on for life.

In April, BlackRock launched a new fund offering called LifePath Paycheck, which is a target-date retirement fund, which invests in less risky assets the closer you get to retirement. New trend: It comes with the option to buy an annuity recommended by BlackRock. People who are in BlackRock target date funds and choose to purchase annuities through their workplace plans are not subject to the normal sales commission fees typically associated with annuity purchases. But they can only be in the fund if they have a managed account in their 401(k) plan and pay a management fee based on their assets.

Nationwide also offers a new target date fund with an annuity option for 401(k) participants called Income America 5ForLife, though it’s structured differently than BlackRock’s product. By being in the fund you will automatically get an annuity payment at retirement and the payment will be based on 5% of your balance when you retire. The product promises to keep paying that amount, even if you spend longer on the account balance. Unlike traditional annuities, you can withdraw your money from the plan without penalty if you no longer want to receive annuity payments.

“This is a new segment that’s growing,” Eric Stevenson, Nationwide’s president of retirement solutions, told CNN. “This is not your father’s annuity.”

What are the disadvantages?
Both products can be used with tax-deferred 401k savings or after-tax Roth 401(k) savings.

For now, they’re only available to employees at companies that offer them and only if they have a managed account in a workplace savings plan.

Ghilarducci warns that this product will not be free. And he advises that, if possible, retirees should choose to manage their own savings. “Then you don’t get charged anything and you don’t pay other people’s profits,” he said.
But for retirees looking for reassurance that they won’t run out of money, some of these new deals may be attractive.

There may be other drawbacks, however: As with other annuities, the monthly payout you get may be smaller if you choose to provide benefits to your spouse after you die, and annuities generally don’t allow payments to go to children. without incurring additional costs.

And annuities can be confusing to navigate – and with many it’s difficult to get your money out once you’re locked in.

There is also the issue of inflation. Annuities do not necessarily offer inflation-adjusted payments, which means the value of your guaranteed salary will decrease over time as you age.

In other words, buyer beware. A fixed salary, even one that emulates a traditional pension, may not be the perfect solution. Although she says she’s not worried about her finances after retirement, Messina, an administrative assistant in New Jersey, admits that she and her husband may have to downsize, even with pension and annuity benefits.

“Even with the amount of money we’re going to get, we can’t stay here in New Jersey,” he said.

The next hurdle is deciding where to settle before they retire. Messina wants to move to South Carolina, while her husband wants to move to North Dakota.

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