Elena Kurkutova | Istock | Getty Images
Older Americans may have a number of different goals with their retirement savings. But most of the time, their main goal is the same: to make sure it lasts.
Unfortunately, many younger baby boomers and next-generation members who don’t have access to a traditional retirement plan can survive the money in their 401(k) accounts, according to a recent study from Boston College’s Center for Retirement Research.
The economists compared withdrawal rates between those with traditional pensions and those with only 401(k) savings accounts. While most research on how long retirees’ money lasts is based on the former, the majority of people now fall into the latter.
More from Personal Finance:
Inflation forces older Americans to make difficult financial choices
Record inflation threatens retirees most, advisers say
Tips for staying on track in retirement, short term goals
“What most people have been able to observe were people on traditional pensions,” said Gal Wettstein, a senior research economist at the Center for Retirement Research at Boston College, pointing out that 401(k) workplace retirement plans only became widespread in the the 80’s.
Those analyzes based on retirees in retirement showed that they often didn’t spend their savings at all. Many even saw their nest eggs continue to grow after they stopped working.
“However, this optimistic idea of the past can give a false sense of security,” Wettstein said.
Retirees with 401(k)s often spend savings quickly
Access to traditional pensions has been rare for decades. Employees have increasingly been tasked with saving for their later years only in investment accounts, the poster child of which is the 401(k) plan offered by employers.
The researchers found that these plans are running out much faster than expected.
One example in the analysis looked at households that retired with $200,000 in savings. At age 70, retirees who had a 401(k) plan but had no pension had $28,000 less than retirees with a pension, according to their analysis — a difference equivalent to one-eighth of that initial balance. At age 75, 401(k) savers had $86,000 less than those who had retired.
“People spend a lot of what they have when they have a 401(k),” Wettstein said.
The rapid withdrawal of savings in 401(k) accounts means many retirees who depend on them are at risk of completely using up their money by age 85, although about half of them will live after that, the study said. .
While they still get their monthly Social Security checks, Wettstein said, “that’s usually not a sufficient substitute for their career-level income.”
Pension helped with ‘how much you could pay’
Because of the relatively new nature of 401(k) plans, more needs to be learned about why retirees spend the bills so quickly, Wettstein said.
Still, some reasons can be assumed. Those who had a traditional pension, which guarantees a fixed payment every month until their death, probably had less to rely on their savings because of that reliable income. They may have been able to keep their savings for inheritance or for unexpected costs later in life.
On the other hand, many retirees without a pension depend on their own nest to cover much of their monthly expenses. Without retirement, it’s also people’s responsibility to make sure they’ve saved enough to last through the years after work, a task that requires decades of adequate earnings and discipline.
In addition, a challenge with 401(k) savings plans is that they ask retirees how much to take out each month. This calculation can be difficult to beat, and while those with significant savings strive to live off the earnings of their money, the market is unpredictable and has periods – like now – when it takes more than it delivers.
“One of the benefits of the pension system was that it reassured you how much you could afford to spend, practically, because it would never run out, and also in the sense of the advice, because it says, ‘Here you can spend that much because next month you’ll get the same amount again,” Wettstein said. “A 401(k) won’t give you that.”
Wettstein stressed that it’s too early to get a full picture of how successful 401(k) accounts are in helping people retire.
“But we did this to see if we should be concerned,” he said. “And the conclusion we’ve come to is, yes, we should.”
This article was written with the support of a journalism fellowship from The Gerontological Society of America, The Journalists Network on Generations, and the Silver Century Foundation†