The New Finance of Longevity

For Workers Struggling To Prepare For Retirement: More Risk & Rising Costs

How housing, healthcare and Long Term Care costs increasingly threaten financial security

A new report from the National Institute on Retirement Security offers four policy solutions to strengthen retirement outcomes. Access the report here. Register for a Sept 16, 2020 webinar on the topic here.

WASHINGTON, D.C., September 9, 2020 – The burden of preparing for retirement is increasing as workers face more risk and rising costs. Escalating housing, healthcare, and long-term care costs in retirement are creating retirement obstacles for Americans. Also, the shift from pensions to 401(k) plans has pushed more retirement risk onto workers.

These findings are detailed in a new study from the National Institute on Retirement Security (NIRS), The Growing Burden of Retirement: Rising Costs and More Risk Increase Uncertainty, available here. Authored by Tyler Bond, NIRS research manager, and Dan Doonan, NIRS executive director, this report provides a roadmap to the many hurdles that are making it increasingly difficult to achieve a financially secure retirement.

An Unsolvable Puzzle?

“Taken together, rising costs and the challenge of accumulating and investing savings are making retirement an unsolvable puzzle for most Americans,” said report co-author Tyler Bond. “We’re on a path to a predictable and unfortunate outcome – millions of working Americans unable to meet their basic needs in retirement. This report details the complex burdens and pitfalls facing workers who often are trying their best to prepare for retirement. We find that four public policies would substantially improve Americans’ retirement outcomes: addressing long-term care costs, creating stronger tax provisions, improving lifetime benefit options, and expanding Social Security,” Bond explained.

“Absent a serious rebuilding of America’s retirement infrastructure, these systemic problems will be unsurmountable for too many families,” said report co-author Dan Doonan. “Instead, policymakers can take steps now to build forward-looking solutions that enable Americans to be self-sufficient as they age. Otherwise, older Americans will be forced to turn to their families or government programs to meet their most basic needs. That is a burdensome, costly and unsustainable approach,” Doonan said.

The report finds that:

  • Saving early and continuously during working years is difficult for many workers. While organizations offer suggested retirement savings targets for each age, many workers may struggle to meet them, even if they have a desire to save.
  • Workers face market timing, interest rate, and longevity risks when they approach retirement age. Any of these risks can derail carefully laid retirement plans and together they can make the prospect of retirement daunting.
  • While older Americans are the most likely to own a home, the number of Americans age 65 and older who are cost-burdened by housing costs has increased as more seniors are carrying mortgage debt into retirement.

Other Findings:

Healthcare costs continue to rise for all Americans, but these costs are higher for older Americans, who are more likely to have multiple chronic health conditions. Furthermore, lower-income seniors spend a greater proportion of their income on healthcare costs than their more affluent peers.

Long-term care costs represent an increasing challenge for many older Americans as more senior citizens need long-term care every year. While it can be prohibitively expensive for those who require nursing home care for multiple years, the majority of seniors receiving long-term care will receive it at home or in a non-nursing facility. This need is projected to increase even more as the Baby Boomers continue retiring.

Creative solutions exist to address these challenges. Washington State is pioneering a program to cover long-term care costs using a social insurance model. The private sector is working to create lifetime income options for retirees and expand access to workplace plans. Meanwhile, experts have proposed allowing retirees to purchase annuities through Social Security. And, expanding Social Security would have a broad impact as most seniors receive the majority of their income through the program.

Excerpts From he Study ‘The Growing Burden Of Retirement

The Challenge Of Savings

Taken together, rising costs and the challenge of accumulating and investing savings are making retirement an unsolvable puzzle for most Americans...

Working people need to start preparing for retirement as soon as they enter the workforce. That might sound paradoxical for a younger worker who may work for another 42 years, but there are good reasons to start saving early. Fidelity’s model assumes workers begin saving 15 percent of their salary at age 25 and have one times their salary saved by age 30.

For a worker who perfectly follows this path and achieves each of the recommended savings targets along the way, they likely will be well-prepared for a secure retirement. Unfortunately, the available evidence suggests this doesn’t happen. Less than half of all workers in the U.S. have access to a retirement savings plan through their employer at any given time.

Workers are 15 times more likely to save for retirement if they are offered a plan through their employer, so this lack of access creates an immediate hurdle to saving. Even if an employer offers a plan, workers may not be eligible to participate in the plan if they don’t work enough hours or have not worked long enough for the employer. These eligibility obstacles particularly impact part-time workers (who are more likely to be women) and younger workers, hindering the recommended early start to saving. Previous NIRS research found that only 40 percent of workers in 2014 were participating in an employer-provided plan, after overcoming the access and eligibility hurdles.

Another problem with the baseline scenario is that it is common to begin saving much later. The fourth scenario looks at the impact of contributing for 25 years, instead of 40 years.24 Here, one should expect to reach half of the target. Most of this is due to lost returns. In the late start scenario, the worker ends up making 78 percent of the contributions that are made in the baseline scenario; however, they miss out on 60 percent of the returns that are accrued in the baseline scenario. If a worker gets a late start, and faces zero percent returns in their final five years of work, they now are down to 37 percent of the baseline target.

Saving enough for retirement is a challenge that most American workers will face. The many hurdles involved in saving enough have been detailed in the first part of this report. Unfortunately, the difficulty of retirement planning doesn’t stop there. Converting savings to income and rising costs in retirement also present obstacles for many senior citizens, even when individuals followed a reasonable savings plan. These issues and their impact on retirement security are discussed throughout the rest of this report.

Fluctuating Interest Rates Impact Income from a Lump Sum:

Interest rates impact the level of income retirees might receive from their savings in a few ways. First, if a retiree plans to purchase an annuity, the interest rate is a key driver of pricing because insurance companies typically invest the vast majority of annuity sales in fixed income products that are interest rate sensitive. This practice makes it more likely that these product lines will not fail due to adverse investment experience, but it also means retirees largely will not benefit from much equity premium in their investments.

In addition, even if an individual hits their savings target, they may not achieve the anticipated level of income from those assets. In short, it is another layer of volatility that arises through timing and interest rate risk. Individuals, unlike long-term investors, cannot smooth interest rate risk over time other than by trying to find an opportune time to purchase an annuity.

Thus, if one would have purchased an annuity in the 1980’s or 1990’s when interest rates were generally much higher (typically from 6 to 14 percent), the assets invested would have produced significant income for the insurance company selling the annuity. This leads to more income for retirees, per dollar invested.

Access the full report here.




The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers and the economy as a whole. Located in Washington, D.C., NIRS’ diverse membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers. More information is available at Follow NIRS on Twitter @NIRSonline.