Sources of retirement income
Individuals may receive retirement income from a variety of sources:
- Personal savings and interest
- Retirement savings plans , Registered Retirement Savings Plan)
- Defined contribution plans
- Defined benefit pension plans
- Social Insurance, Social Security
- Rental income
- Sale of assets to provide income
Each has unique risk, eligibility, tax, timing, form of payment, and distribution considerations that should be integrated into a retirement spend-down strategy.
Adverse impact of market downturn and lower interest rate
Market volatility can have a significant impact on both a worker’s retirement preparedness and a retiree’s retirement spend-down strategy. American workers lost an estimated $2 trillion in retirement savings during this time frame. 54% of workers lost confidence in their ability to retire comfortably due the direct impact of the market turmoil on their retirement savings.
Asset allocation contributed significantly to these issues. Basic investment principles recommend that individuals reduce their equity investment exposure as they approach retirement. Studies show, however, that 43% of 401(k) participants had equity exposure in excess of 70% at the beginning of 2008.
World Pensions Council (WPC) financial economists have argued that durably low interest rates in most G20 countries will have an adverse impact on the underfunding condition of pension funds as “without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years”
From 1982 until 2011, most Western economies experienced a period of low inflation combined with relatively high returns on investments across all asset classes including government bonds. This brought a certain sense of complacency amongst some pension actuarial consultants and regulators, making it seem reasonable to use optimistic economic assumptions to calculate the present value of future pension liabilities.
The potentially long-lasting collapse in returns on government bonds is taking place against the backdrop of a protracted fall in returns for other core-assets such as blue chip stocks, and, more importantly, a silent demographic shock. Factoring in the corresponding longevity risk, pension premiums could be raised significantly while disposable incomes stagnate and employees work longer years before retiring.