Individuals saving for retirement increasingly have to make more, and more complex, decisions which has “put more risk on individuals and households,” according to a Congressional Research Service report.
The report cited the growth of personally directed retirement savings including IRAs and employer-sponsored programs such as the TSP and other 401(k) type programs. “The tax implications of different retirement vehicles can be complicated. In addition, individuals generally have access to more investment product offerings within retirement accounts, further complicating these decisions,” it said.
Further, increasing life expectancy means that “many individuals need to plan for a longer period in retirement than in the past, making saving and financial planning more important for maintaining their preretirement standard of living.” Unlike financial decisions such as car loans where people gain experience by going through the process repeatedly, it added, “many people do not have prior experience to inform their own retirement needs.”
“For these reasons, household financial decision making relating to retirement is both difficult and important. Currently, retirement planning includes many decisions relating to saving, investing, and decumulating (or spending down) retirement wealth over a person’s lifetime. Making these decisions successfully may require complicated calculations involving uncertainty about the future—for example, how high (or low) inflation and market returns will be, how much future health care will cost, and how long family members may be able to work and will live,” it said.
It said that ways to make the process less challenging for investors could include stepped up financial literacy programs that cover, for example, impact of taking out money before retirement through loans and allowable withdrawals and how a given amount of savings would translate into income in retirement.