Retirees have a large lump sum of money to deal with when they cash in their 401(k)s, which is both a good thing and a bad thing, according to two financial insiders.
It is good that they have a large lump sum of money to fund their retirement, but dealing with that pile of money is more complicated than dealing with a monthly pension payment.
Fewer companies have a defined benefit pension plan which give an employee a monthly payment until he or she died. That was easy to manage and lasted a lifetime.
But retirees with a 401(k) or individual retirement account they are no longer contributing to must figure out how to manage disbursements from that money to make it last for the rest of their lives.
The modern scenario is much more complicated, according to Craig Copeland, senior research analyst at the Employee Benefit Research Institute, and Geoff Sanzenbacher, associate director of research at the Center for Retirement Research at Boston College.
“This is becoming a bigger issue as people are living longer and as older people become subject to cognitive decline,” Copeland said. “This has the potential to be a huge problem for society.”
The two were speakers at a recent conference on “Aging, Cognition and Financial Health” sponsored in part by the Federal Reserve Bank in Philadelphia.
Some $5 trillion in retirement money is concentrated among Americans ages 55 and older. Figuring out how to spend this money can be a problem for retirees, they said. And it is a problem that gets worse as retirees age and begin to experience cognitive decline. Managing finances is one of the first ways cognitive decline manifests itself, they said.
“Programs need to be set up when retirees are younger so that disbursements are automatic as they age,” Copeland said.
One solution now available is an annuity that pays a lifetime income, but Sanzenbacher said not many people are opting for annuities.