WITHDRAWALS AND LOANS DOWN
Only 17.0% of people have an outstanding loan from their 401(k) last year
NEED FOR RETIREMENT
Most older Americans know very little about annuities
UNLIKE their younger counterparts,
individuals nearing or in retirement
do not have the luxury of a long time-horizon to grow their nest egg. They
have reached the point where developing a strategy to sustain their assets
and draw retirement income is critical.
However, many lack the knowledge to
do so effectively.
According to a survey by the American College of Financial Services, 74%
of respondents failed a retirement
income quiz. Of those who passed, only
5% scored a “B” (80%) or higher.
In particular, some respondents
failed to correctly answer questions
about preserving assets and sustaining
income in retirement. The survey found
only 38% knew that $4,000 is the most
they could afford to “safely” withdraw
per year from a $100,000 retirement
account, and only 34% knew that a
substantial negative investment return
at retirement age is more damaging to
portfolio sustainability than the same
negative return a number of years
before or after retirement.
The study also indicates that most
respondents are unaware of best practices to execute near retirement. Only
33% showed they understood the
benefits of working two years longer or
deferring Social Security for two years
as opposed to increasing contributions
by 3% for five years just prior to retirement. Moreover, fewer than half knew
that using a portion of their portfolios
to purchase a life annuity can protect
against longevity risk.
Only 29% knew that buying an
annuity is less expensive for an older
person than a younger one; only 17%
knew the lifetime income payout rate
for a 65-year-old male is roughly 7%;
and only 14% knew an annuity with a
guaranteed lifetime withdrawal benefit
can pay income even if the investment
drops to zero.
However, the research highlighted
several areas for which older Americans scored very well. Subjects marked
by high proficiency include housing
finances, Medicare issues, the principle
of inflation, the role taxes play in retirement, and life insurance concepts.
More men (35%) passed the quiz than
women (18%). More than half (82%) of
women failed the quiz, suggesting the
need for targeted education to them.
WITHDRAWAL and contribution data
indicate that essentially all defined
contribution (DC) plan participants
continued to save in their retirement
plans at work last year, according to
“Defined Contribution Plan Participants’ Activities, 2016” by the Investment Company Institute (ICI).
ICI data shows that, in 2016, 3.3% of
DC plan participants took withdrawals
from their plan accounts, with 1.5%
taking hardship withdrawals. These
levels of activity are similar to those in
2015, ICI says.
Loan activity in 2016 remained in
line with more recent quarters, when
it had stabilized after a three-year
rise. The percentage of defined contribution plan participants with loans
outstanding rose from the end of 2008
( 15.3%) through 2011 ( 18.5%). That
percentage leveled out between 2012
and year-end 2014. At year-end 2016,
the figure was 17.0%, compared with
17.4% at the close of 2015.
The ICI research also found that
the share of participants who stopped
making contributions last year was in
line with activity in prior years. In 2016,
2.7% of DC plan participants stopped
contributing, compared with 2.6% in
2015 and 2.8% in 2014. It is possible that
some of these participants stopped
because they had reached the annual
contribution limit, ICI says.
During 2016, 9.4% of plan participants had changed the asset allocation
of their account balances, compared
with 9.7% during 2015. Reallocation
activity regarding contributions in
2016 was slightly lower than in recent
years: 5.6% of DC plan participants
changed the asset allocation of their
contributions in 2016, compared with
7.6% in 2015 and 6.6% in 2014.
DC plan assets are a significant
component of Americans’ retirement
assets, representing more than one-quarter of the total retirement market
and about one-tenth of U.S. households’ aggregate financial assets at
year-end 2016. —Rebecca Moore
Percentage of Participants
With 401(k) Loans Outstanding
Source: Investment Company Institute
2015 2011 2016
17.4% 18.5% 17.0%