Hardy Plumbing
March 29, 2006

Generating "Paychecks" In Retirement

As a generation of Americans inches closer to retirement age, they are taking on greater personal responsibility for their own retirement security.

Americans nearing retirement have clear goals — they want to have a stream of retirement income to live comfortably on, and they want to maintain financial independence and avoid becoming a potential burden to others. Yet, these near-retirees are neither sufficiently informed nor prepared to generate a retirement "paycheck" for themselves, and therefore their outlook for achieving their most cherished retirement goals is shrouded in uncertainty.

These are the results of Prudential Financial's fourth annual "Workplace Report on Retirement Planning" study on retirement issues. The 2004-2005 study polled 1023 full-time employed Americans (aged 55 to 64) who are near-retirees about their retirement knowledge, goals, actions and plans. In a nutshell, the results indicated that many near-retirees need the help of an investment professional.

Few Are Prepared

Creating a retirement "paycheck" that lasts throughout retirement is almost the universal goal among those approaching retirement. With retirement around the corner, however, and just one in five feeling "well informed" on how to generate retirement "paychecks," most near-retirees today are clearly unprepared for the important task of securing a guaranteed stream of retirement income.

Even more alarming, certain subgroups of near-retirees — women, those who are single, divorced or widowed, those without a traditional pension, or those with relatively low income or savings — feel even less informed. As a result of this lack of preparation, just 20% of near-retirees feel "very confident" that they will achieve one of their most cherished goals — a guaranteed income during retirement.

Few Focus On Income Planning

Most Americans approaching retirement have not begun to prepare themselves for the transition to retirement, clearly one of the most significant changes that will take place in their lifetime. As their years of employment wind down, the great majority of near-retirees are still focused on "asset accumulation." Over six in 10 are looking to increase assets by saving more or achieving better returns, and nearly one in four hope to preserve what they have.

While asset accumulation is an important goal, few near-retirees are preparing for "asset distribution," which is the next phase of the retirement planning cycle. Just 155 say they have shifted their focus away from the "nest egg" to how best to generate a stream of income during retirement. The neglect of retirement-income generation is common across all the subgroups of near-retirees — whether measured by age, gender, marital status, education, household income or level of retirement savings.

The Guessing Game

When Americans in their late 50s or early 60s were asked to calculate how much retirement income they could generate, few felt able to provide an accurate estimate. The majority are either guessing how much income they would have, or even worse, simply have no idea of how much income they will be able to generate for themselves during retirement.

Unfortunately, near-retirees cannot afford to ignore the retirement income issue. There is too much at stake. Procrastination is risky, as the options to correct a miscalculation or shortfall are much more limited once retirement nears. For today's near-retirees, the time to act and prepare is now.

Understanding The Options

Many of today's retirees enjoy "peace of mind" knowing they can get a guaranteed stream of income for life from their traditional pensions. Such a luxury will be increasingly hard to come by as fewer employers offer traditional pensions.

For today's near-retirees to still have a pension-like guaranteed income from their personal retirement savings, including assets in defined contribution plans such as 401(k)s, they must be willing to make use of appropriate financial products to accomplish this goal. Income annuities are one of the ways by which retirees can convert their personal retirement savings into a guaranteed stream of retirement income.

Are near-retirees willing to accept income annuities as a solution to their need for an income during retirement? At this point, the answer appears to be a resounding "no." Less than half of near-retirees have heard of an income annuity, and fewer than one in six have a good understanding of its benefits.

Currently, just nine percent plan to utilize the benefits of income annuities.

The remaining near-retirees seeking guaranteed income need more education and exploration of their options.

Americans are increasingly aware of their own responsibility for securing a comfortable retirement. But as retirement approaches, millions may face the challenge of how to create a stream of income during their post-employment years by creating a "paycheck" from their savings.

Reprinted from Investors Resource Magazine — a publication of American Skandia, A Prudential Financial Company.

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