Defined Benefit Programs of Value, Says Study

A recent study demonstrates the importance of a defined benefit program, like the FERS or CSRS civil service annuity. It shows how much faster those without such benefits deplete their assets after retiring.

According to the Center for Retirement Research, given the erosion of defined benefit plans in the private sector, historical data on drawing down savingsâ€â€which is used in calculations of how much people should have saved to guarantee enough income in retirementâ€â€might paint an overly optimistic picture of retirement preparedness.

It discovered that half of the oldest Boomer households, born in the late 1940s, have at least one spouse with a defined benefit. That drops to around a quarter for the generation’s middle, people born in the mid-1950s, and less than a tenth for the youngest, people born in the early 1960s.

Previous studies focused on older generations with significant defined benefit (DB) coverage; the validity of drawdown estimates based on these cohorts for future cohorts with considerably less DB coverage is unknown… Any projections of the speed of drawdown for Baby Boomers based on the sluggish depletion of previous generations would likely underestimate the rate at which retirees pull down their assets, it warned.

For instance, it discovered that retirees with $200,000 of initial wealth (about the midpoint in the data) who are insured by a defined benefit plan lower their financial assets by $28,000 less by 70 than those who aren’t covered by such a benefit.

It concluded that past generations’ access to a DB pension was related to the delayed depletion of their financial assets. Furthermore, the greater a retiree’s annuity holdings (including DBs, Social Security, and commercial annuities), the slower they drew down their other assets.

Projections for the Baby Boomer generation based on previous generations’ drawdowns are likely to underestimate their downturn speed. The findings show that Baby Boomers without DB plans may be depleting their assets quicker, putting them in greater danger of outliving their savings.

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