Retirees with a defined benefit plan had less need to draw down financial assets to cover their spending. Image: Ground Picture/Shutterstock.com
By: FEDweek StaffWhile those who retired in the past often drew down their savings only slowly afterward, or even left enough in place so that they grew, that likely will not be as much the case for future retirees, a study by the Center for Retirement Research says.
It said that explanations for what has been called the “retirement puzzle” regarding savings drawdowns include desire to have wealth to guard against large medical costs, to pass on as a bequest, or to protect against outliving the money.
“This pattern, however, may not hold for new retirees, who are more likely to rely on a defined contribution (DC) plan than a defined benefit (DB) plan. Retirees with a DB plan had less need to draw down financial assets to cover their spending and could reserve these assets for late-life medical expenses or bequests,” it said.
That raises the risk that they will not be able to meet those same goals, it said.
In the federal government, both the CSRS and FERS systems have both defined benefits (the civil service annuity) and defined contributions (the Thrift Savings Plan). However, all but a few percent of employees are under FERS, whose defined benefit is only roughly half of that of the CSRS defined benefit. The value of employer contributions toward the TSP on their behalf plus the value of Social Security benefits was assumed to make up for the difference.
However, that still leaves FERS employees more reliant on their defined contribution element than were CSRS employees when moving into retirement.
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