A decade has passed since the unofficial tipping point that launched America into The Great Recession. In the fall of 2018, Lehman Brothers filed for bankruptcy, which started a seismic shift that culminated in Congress rejecting the bank bailout bill, sending the Dow Jones Industrial Average plummeting 777.68 points—which, until earlier this year, was the largest single-day point drop in history.
Researchers estimate Americans lost a combined $2.7 trillion of their retirement savings during The Great Recession.¹ Another report, published in October, 2018 by the Federal Reserve Bank of San Francisco, found the average American lost $70,000 in lifetime income.² No matter how you look at it, there is no questioning the impact the financial crisis continues to have on everyone who experienced it.
For the Silent Generation, many of whom began their lives in the wake of The Great Depression, the 2008 financial crisis wiped out years of retirement savings, too late for many of them to fully recover. For Baby Boomers—who are now leaving the work force at a rate of 10,000 each day—The Great Recession was an unexpected speed bump on the way to a retirement, that for many, had to be pushed farther down the road.³ For Gen Xers entering their prime earning years, this period meant stagnant wages and a steadily rising unemployment rate. And for Millennials, who now make up a larger percentage of the workforce than any other generation, The Great Recession created a difficult early-career job market.
Even as many are still picking up the pieces a decade later, a different retirement crisis now looms for many of the same individuals. The question that needs to be asked is whether these last 10 years have taught us the importance of a “recession-proof” retirement.
"The question that needs to be asked is whether these last 10 years have taught us the importance of a “recession-proof” retirement."
The looming retirement crisis stems from three primary factors: the shift from employer-funded pensions to self-funded 401(k)s, which are vulnerable to market downturns; the uncertain future of Social Security, the primary safety net for many Americans; and increasing lifespans. These factors have prompted a different retirement conversation, one focused primarily on accumulation—the need to grow—to save as much in individual 401(k)s as possible. What’s missing from these conversations is something that used to be a critical component of American retirement—a reliable, steady, protected income stream that lasts a lifetime. Americans in today’s workforce face the uncertainty of not knowing what they’ll have as protected, reliable income in retirement, an uncertainty that has real life effects.
Some of these effects were uncovered in a new study from the Consumer Bankruptcy Project, which found a startling statistic about those entering retirement age. The rate of people 65 and older filing for bankruptcy is three times what it was in 1991, and that same group accounts for a far greater share of total filers.⁴ The study confirmed the three-decade shift of financial risk from the government and employers to individuals as one of the key drivers of this trend.
It’s important to point out financial planners typically suggest a replacement rate of at least 70 percent of your pre-retirement income to maintain your lifestyle once you retire.⁵ For the large percentage of Americans who lack employer-provided pension plans, many overestimate how much retirement income they’ll receive from Social Security and assume they’ll be able to supplement the rest from their 401(k) plans.
While it’s critical to take full advantage of employer-provided direct contribution plans—like a 401(k)—these strategies alone are not the answer. First, for most of us, contribution rules don’t allow participants to accumulate enough to fully fund the gap between Social Security and the monthly income required to retire comfortably and without worry. Not all employers offer them and too few people participate in them. With Social Security only replacing approximately 40 percent of pre-retirement income, future retirees are left with the challenge of bridging the gap between the money they have and the money they need.
Perhaps most critically, 401(k) investments are unprotected—meaning they are vulnerable to market downturns, as The Great Recession so dramatically illustrated. Even if you can create a scenario that gets you to at least 70 percent of your pre-retirement income, there is a real risk of losing a significant percentage to downward swings in the market. Although our country is in the midst of the longest bull market in its history, the next market correction is inevitable. It’s not a question of if, but of when, and how much.
And when that happens, we need to make sure that the millions of Americans saving for retirement aren’t vulnerable to the same life-altering impacts that were experienced following the 2008 crisis. We need to change the retirement planning conversation back to one focused on the idea that protected lifetime income in retirement—something that we can count on year in and year out—should be part of any sustainable financial plan for retirement. This shouldn’t be an “either/or” conversation. Instead, this should be a conversation that focuses on the real-life need to both protect an income stream for the future while maintaining the opportunity to continue to grow retirement savings.
The financial services industry must advocate for policies that help explain retirement realities for Americans, such as providing illustrations that demonstrate the role lifetime income products can play. The guarantee of a protected monthly “lifetime income check” † can relieve retirement savers of the fear of losing their income stream in a recession‡ and can supplement income from other sources like Social Security and 401(k). Investors may lose principal from investment products, such as variable annuities, if the contract value declines and withdrawals are made prior to annuitizing in retirement.
Our mission needs to stay focused on making sure all Americans understand how to protect and potentially grow their retirement income. This is why 24 financial services firms have joined together to create the Alliance for Lifetime Income, which seeks to enhance awareness and understanding about the need for and sources of protected lifetime income by offering important educational resources.
We’ve certainly learned a valuable lesson as an industry. We must remain steadfast in our pursuit to help Americans “recession proof” their retirement, to prevent the next generation of retirees from ending up in the same situation.
Investing involves risk, including possible loss of principal.
Variable annuities are long-term, tax-deferred investments designed for retirement, involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½.
† Guarantees are backed by the claims paying ability of the issuing insurance company. Guaranteed lifetime income is available through two different options, annuitization and optional living benefits. Please note that not all optional living benefits offer guaranteed lifetime income, are not available on all annuity products and may have an additional charge.
‡ Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.