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Roadmap to retirement

PensionHelp America connects people who need help with their pension, k , and other retirement plans with the pension counseling projects, legal services providers, and government agencies that can help answer their questions. Visit www. Let our roadmap to helpful information about retirement plans for private-sector workers put you on the path toward a secure retirement.

Get started. The House Ways and Means Committee took a significant step today toward resolving a pending national retirement crisis affecting millions of workers and retirees. It did this by voting in favor of a bill that would provide a lifeline to financially teetering pension plans in the form of government backed loans. An annuity is a pension benefit that is paid out in a specific amount over a set period of time. Annuities typically last for the lifetime of the participant, or the lives of both the participant and his or her spouse, depending on the type of annuity selected.

Projection of Levels of Future Active Participants in Multiemployer Plans

Joint-and-Survivor and Single-Life are types of annuities. Connect with us:. Not so fast. View Report. Plan Coverage Should Not Adversely Affect Government Benefits - Salary deferrals under a k type plan should not be counted as income for purposes of income-based government benefits or subsidies. Counting salary deferrals as income for such purposes discourages plan participation and retirement savings.

The additional contributions would be used to enhance the employee's Social Security benefits including disability and survivors benefits.


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Social Security's indexed defined benefits will remain a critical component of most Americans' retirement income. Those benefits would be increased to reflect any supplemental contributions made for an individual. This approach offers many advantages. First, the program would be relatively simple and involve de minimis regulation. Employers and employees are already familiar with the Social Security system.

Employers and employees already contribute in the form of payroll taxes to the system for the basic benefits. There would be relatively little need for marketing. Second, the Social Security Administration would be responsible for all administration, relieving employers of the cost of administration and regulatory compliance. In essence, the only cost to the employer would be the contributions.

Third, coverage and participation would be automatic, so no employee would have to affirmatively elect to participate. Fourth, benefits would be immediately vested and fully portable. Fifth, benefits would be payable as a life annuity that could not be outlived. Sixth, generally there would be no risk of loss of benefits due to plan or employer termination, to investment experience, or to administrative and management fees. The attractiveness of this program could be enhanced by additional incentives such as tax credits for contributions, matching contributions by the Federal Government, or tax-free distributions.

We recognize that such a program could increase the cost of administering Social Security. But, we expect that this cost increase would be only incremental. The choice would be the employer's, subject to any collective bargaining obligations or legal constraints on the employer. We believe that this approach deserves serious study.

Such issues would include whether the Social Security Administration has the resources and capability to administer a supplemental program, how to prevent discrimination in employer contributions, how to enforce the employer's contribution obligations, and how to protect the supplemental contributions from being used to fund basic benefits, as well as how to design any additional tax incentives. Most importantly, the program should be designed so as not undermine employer-sponsored, qualified plans.

We recommend that the Secretary of Labor use her influence as a member of the President's Cabinet and as the principal administrator of ERISA to encourage and persuade the Administration and Congress to take these actions as soon as possible. We further recommend that the Secretary urge the Administration to convene an interagency task force to develop a coordinated, comprehensive program for expanding plan sponsorship and participation, including implementation of a supplemental Social Security program.

Hinz provided a statistical overview of the current state of private sector, employment-based pension coverage and participation in the United States based on the Contingent Work Supplement to the February Current Population Survey and other sources. He also discussed how various employer and worker attributes correlate with pension coverage, and proposed an approach to evaluating various factors. He also described the complexity of supply and demand interactions in pension coverage.

He made the following specific points:. The path to a secure retirement has many steps; the employer must sponsor a pension plan, the employee must be eligible for participation, the employee must participate, the employee must make any required contributions, the employee must invest wisely in a self-directed plan, the employee must rollover his account upon a change in job, and the employee must convert his pension to retirement income upon retirement. In firms that sponsor k plans, about two-thirds of employees who are offered participation choose to participate.

Interpreting coverage and participation data is tricky because of the range of individual circumstances of workers, including coverage under multiple types of plans, pensioners who return to work and lack coverage at the new job, and some workers do not understand a k plan to be a pension plan. About 43 million of workers have pension coverage, and 55 million are not covered. This represents a "fairly formidable coverage issue. From to , the percentage of the workforce employed by firms with pension plans has remained within a couple of percentage points.

All of the interventions that have been tried and all of the external forces that have influenced us over the last 20 years, it hasn't budged the pension coverage rate more than a percentage or two. Coverage might be better than the data show because some workers when asked if their employer has a pension plan answer no because they do not understand a k plan to be a pension plan.

During , the total number of private sector plans remained steady at about , But, the composition of this universe of plans has changed. The number of defined benefit plans decreased dramatically, the number of k plans increased, and the number of non k defined contribution plans remained roughly the same. The number of active plan participants substantially increased during , but this increase has been in proportion to the growth in the workforce, leaving the coverage rate unchanged.

This growth has been in DC plans. During , the number of workers covered by DC plans only increased substantially, the number covered by DB plans only declined, and the number covered by both DC and DB plans remained stable. Part-time workers are less likely to be employed at firms sponsoring plans and were less likely to become participants in their employers' plans.

However, full-time and part-time workers with similar earnings have similar pension coverage rates. Male pension coverage has been declining as a share of the workforce, and female coverage has been increasing. Young males as a group tend not to participate. Traditionally male industries that were the core of pension coverage in past decades have been in decline. The higher the earnings level, the lower the coverage and participation rate differences by gender. Even at higher earnings levels, there were significant differences in coverage and participation rates among various ethnic groups which could indicate cultural differences.

Regarding union representation, "the most powerful explanatory variable is collective bargaining status. Even at various earning levels, workers covered by a union contract have higher pension coverage rates than workers who were not covered by a union contract. There is a significant association between size of firm and coverage. Participation rates tend to be about the same. The size of the firm is a significant factor independent of earnings levels of the workers.

The larger the firm, the more likely pension coverage and participation at all earnings levels. There are significant differences in coverage rates among industries, although there are cross-cutting factors such as union representation, prevalence of traditional defined benefit plans in which coverage and participation are not elective, size and earnings. In commercial, utilities, manufacturing, finance, and mining, coverage rates are relatively high. In agriculture, construction, and retail, the coverage and participation rates are relatively low. There is a high correlation between education level and plan coverage and participation.

There is a high correlation between earnings and pension coverage and participation. Conventional levers for pension coverage interventions include raising benefit limits, relaxing nondiscrimination rules, subsidizing employer administrative costs, tax credits for lower income workers, limiting eligibility exclusions, broadening the range of tax qualified plans, and increasing education and outreach.

The central question is whether the lack of pension coverage and participation is a demand problem or a supply problem: is it that workers do not demand plans, or that employers do want to sponsor plans?

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This is a difficult question, and the law is littered with failed attempts to increase coverage and participation based on oversimplified assumptions about the cause of the problem. Workers who decline an opportunity to participate in their employer's plan have similar characteristics to workers in firms that do not sponsor plans. This is simple evidence of a worker demand problem. PWBA has prepared a regression model to estimate what would happen to participation take up rates if all employers who do not sponsor a plan were to sponsor a k plan and offer the plan to their employees.

Preliminary estimates are that the best case would be that In contrast, This suggests that even if employers sponsor plans, worker behavior must be changed to increase participation rates. Hounsell made the following points in her testimony concerning the pension coverage and participation issues affecting women:. One-size-fits-all information about retirement savings will not be as effective as personalized counseling or information; information that is tailored to the person's particular circumstances; small meetings and one-on-one sessions.

Many women simply do not have time to read all of the information that is out there. And, much of the information is complex. Women need to be convinced to take a long-term view of their finances.

Challenges Facing American Workers

Once this attitude shift has occurred, women need to know that they have to do something to plan for retirement, or else they're going to have to work until they drop. From this perspective, women can more easily realize that how much one is able to save for retirement is directly related to how much one works and how much one earns. And women tend to lose out on both those fronts. Increasing pension coverage for women is more than just persuading them to save more.

It's a matter of educating women that a pension, or some other retirement vehicle, is a critical component of their total compensation from work. So when comparing compensation packages, women need to evaluate the whole compensation package and not just the monthly paycheck. The education needed is not merely that of explanation or explication. The need for pension coverage must be shown to women in a relevant and gripping manner. It is not enough that women have access to pension and retirement information via the internet or at work. The basics of how best to gear up for retirement have to be driven home until women are actually signing up for retirement savings vehicles.

The fact that women remain so unaware of the need to save and how to better prepare themselves for retirement is all the more critical given the shift from defined benefit to defined contribution plans. DC plans shift much of the responsibility of retirement from the employer to the employee.

Women cannot wait to happen upon a financial planner; by then, it is too late to effectively deal with the issue of a decent retirement. Employers and government must reach out to women; commercial promoters ignore them because they tend to be low-income. Ferrigno made the following points in his verbal and written presentations about expanding pension coverage and participation from the perspective of promoters of DC plans:.

The private employer-provided retirement system has overwhelmingly succeeded in providing benefits to its target population--full-time workers age 21 and older, who have completed a minimum eligibility period of up to one year. Small business is the last major area where pension coverage is lacking, particularly employers of fewer than 50 employees. According to the CRS reports, participation in small firms increased from to , and that tend has likely continued. But, more needs to be done.

A major reason for small businesses not establishing qualified retirement plans for their employees is their belief that they are unfairly targeted by regulation. Some of these concerns may be addressed by the pending tax legislation. Lower income workers are unlikely to save for retirement except in employer plans. Tax credits for lower income workers would encourage participation. Automatic enrollment programs have been shown to increase participation rates for lower income workers.

They should be encouraged through nondiscrimination rule relief. Nonqualified retirement plans are on the rise and this bodes ill for the retirement system. There is a trend of executives to utilizing Nonqualified plans, which makes them less interested in qualified plans with adverse effects on the retirement plans for the rank-and-file workers.

Consultants are promoting this conversion as a way for small businesses to avoid costly government regulation of qualified plans. A further reduction in the capital gains rates would make nonqualified plans even more attractive. There is not a sufficient connection between tax policy and retirement policy. For example, annuity vehicles should be promoted through favorable tax treatment that is only available through the qualified plan system.

The trend of employers shifting from DB plans to k plans is not helpful, particularly when the employer does not contribute. Benartzi made a presentation about the Save More Tomorrow SMarT plan developed by him and Richard Thaler of the University of Chicago to promote employee retirement savings through use of behavioral economics. He made the following points in his verbal and written presentations:.

There are three problems with k plans: 1 not enough people participate; 2 participants do not save enough; and 3 participants do not invest wisely. There is evidence that automatic enrollment plans do increase participation in k plans. But, automatic enrollment reduces aggregate savings. Employees generally do not elect out of a plan into which they have been automatically enrolled, and they tend not to elect out of the default savings rate set by the automatic enrollment program and not to elect out of the conservative, default investment.

Providers are concerned that automatic enrollment programs produce lots of small accounts that are costly to administer. The psychology of the SMarT Plan is that: people want to save more but lack self-control; self-control restrictions are easier to accept if they take effect in the future; people are very sensitive to perceived losses in their welfare and reductions in their paychecks; and people are adverse to taking action inertia.

The features of the SMarT plan are: 1 employees are automatically enrolled into the plan negative election ; 2 employees pre-commit to higher contribution rates in the future; and 3 employee contribution rates are increased when the employee's salary is being increased. Through automatic enrollment participation rates are increased and through automatic contribution rate increases synchronized with salary increases the retirement savings are increased. Employees may decline to participate in a plan because they do not speak English and cannot read the material about the plan. Peer opinion leaders on the job can also influence whether employees elect to participate.

Calabrese made the following points in his verbal and written presentations concerning his proposal for using voluntary, citizen-based retirement savings accounts to increase pension coverage:. During the best of times, a majority over 70 million of working adults do not have an employment-based pension plan. Federal retirement policy should be recast to be citizen-based rather than employer-based, and to use matching, refundable tax credits rather than tax deductions. Five important policy goals would be advanced by citizen-based matching accounts: 1 improving individual retirement security; 2 increasing national savings and investment; 3 achieving complete career account portability; 4 transferring the social benefit burden from employers to society, particularly for low-income workers; and 5 reducing inequality in both benefit levels and in saving incentives.

According to a "MINT" study commissioned by the GSA, projections of pension income over the next 30 years indicate that it will remain essentially the same as today based on today's coverage rates and growth in the economy. Pension coverage in the private sector peaked in the s and has been declining ever since. The drop-off has been more severe for men than women. IRAs are not compensating for this lack of employer-plan coverage. Decline in "old economy" industries has caused some of the decline in coverage. Coverage, as well as employment, shares have fallen in every goods producing industry as well as in transportation, communications, and utilities.

Coverage rates, and employment share, have increased in service producing industries. Changes in relative size of employer is a major factor. The entire decline in pension coverage since has occurred among blue collar and service occupations. Coverage for managerial, professional and technical occupations has increased.

A factor in the decline of coverage is the shift from DB plans to DC plans. Workers have to elect to join a k plan. Portability and immediate vesting of pensions are a better fit with new economy labor trends. Labor mobility is up. Average job tenure is down. Nearly one-third of the workforce is in "non-standard" jobs: part-time, temporary, contract worker, or self-employed.

This "free agency" workforce makes traditional pension coverage less adequate, especially for working mothers. The current system for encouraging employees to sponsor plans is a public-private welfare system. Majority of small employers under employees do not want the burden of sponsoring plans. Thus the shift from DB plans to DC plans in part. There is a widening inequality in benefit levels and savings incentives between higher and lower income workers.

The ratio of the value of pension contributions between the highest and lowest paid one third of jobs had risen to 6 to 1 as of Tax deductions for pensions favor those in the highest tax brackets and provide little or no benefit for the bottom third of workers who don't pay income taxes. The employers can pass little in the form of tax benefits on to low income workers. System should be restructured to provide voluntary citizen-based retirement savings accounts on top of Social Security. Accounts would be available to all workers. Deductions would be replaced by refundable tax credits.

Contributions would not be taxable upon withdrawal. Matching tax credits would apply to contributions from any source: employer or employee. Employers would have an incentive to provide pension contributions for low income workers. There would be no need for the anti-discrimination requirements. There would be complete career portability.

If an employer does not sponsor a plan, an employee could set up his own account and have the employer deduct contributions from payroll and send them along with FICA payments. More conventional, incremental reforms to the current system that would increase pension participation include: encourage payroll deduction IRAs by requiring employers to forward deductions at employees' requests; eliminate distinctions among different kinds of DC plans; require automatic plan enrollment; and, shorten vesting periods to one year.

Turyn and Ms. They made the following points in their verbal and written presentations:. The survey is based on interviews with employers of between 5 and employees; of which sponsor pension plans, and of which do not. Based on answers to true-or-false questions about legal rules governing various types of plans, there is substantial misunderstanding among plan sponsors and non-plan sponsors alike. Employers not sponsoring plans tended to employ few workers.

Employers with higher gross revenues tended to sponsor plans. Employers sponsoring plans were slightly more likely to be in business longer, to be in professional services, and to be non-family owned. Workers of non-sponsors are more likely to be younger, shorter-tenured, lower paid, and less educated.

Health care costs will be a major retirement cost. Employer-provided retiree health coverage is going away. The Medicare benefit is a 's benefit at best and is unlikely to be updated for lack of revenues. Social Security's future is uncertain. The retirement model that we have been relying on is breaking down. There has been a steady pattern of growth in the cost of administering pension plans. The cost burden has been somewhat higher for smaller plans.

For smaller DB plans, the administrative costs outweigh benefit accruals well into a worker's career. Since s, both the number of DB plans and number of participants in DB plans has decreased. DC plans and participation continued to grow through the s. From the early s to the latter s, when legislative activity was the most significant, there was a steady decline in workers covered by plans at lower income levels.

There has been a stabilization in legislative activity and coverage rates since the late s. There is a much higher rate of pension coverage in the union sector than non-union sector. The long-term decline in the percentage of the workforce represented by unions has played some role in the decline in pension coverage.

The increase in labor force participation by women and their tendency towards part-time employment is also a factor in the decline in coverage rates. Statistics show that even at lower earnings levels, people do save and will save if given the opportunity. A match is important to encourage participation. So, also, is communication with workers about saving. In considering how to increase coverage and participation, we must focus on the type of plan to which our culture has driven us - k plans - and quit beating our heads against a wall trying to bring back the "good old days" of the DB plan.

The fundamental problem with our Nation's retirement system, including the Social Security system, is that there is not enough money being put in it.

Megan's sponsorship story - World Vision

The k plan system has been effective in getting money into the system, especially where there is an employer match. Additional voluntary retirement savings could be generated by allowing individuals to establish Social Security supplemental accounts, providing a dollar-for-dollar matching contribution, and providing tax credits for low income workers. Social Security has to be restructured; it needs more revenue, and benefits have to be raised at the low income level.

The annual per capita increase in administrative costs for DB plans between and as 8. Administrative costs for DC plans increased between and at an annual rate of 5. There is a need to educate people about the value of an annuity, a stream of income for life. People are afraid of dying before receiving value for their money. This should be addressed by product design. Blitzstein made the following points in his verbal testimony concerning the important role of multiemployer plans in pension coverage and participation:.

The UFCW believes that all workers, including part-timers, should be covered by a pension plan. Pension coverage is a top bargaining priority, for members as well as the leadership. They are measurable, secure, and provide lifetime annuities so that pensioners do not outlive their retirement income. Multiemployer plans, which cover 5 million actives and 3 million retirees, are an untapped resource for policymakers to address pension coverage and participation problems. They offer several advantages. A multiemployer plan provides a central, pooled fund for workers in mobile, decentralized industries in which single employers would not have the money or interest to establish their own plans.

These plans have internal portability; a worker who changes jobs. There is a PBGC priority issue that needs to be resolved. Pre-tax employee contributions to a DB plan should be allowed. A k -type structure within a DB plan should be permitted. There should be more education about DB plans.

This could be advanced by requiring DB plans to issue annual benefit statements that include estimates of benefits at early and normal retirement. She addressed four issues: 1 many low and moderate earners do not have pension coverage even though they need more than Social Security income for retirement; 2 expansion of the employment-based pension system is unlikely and may not be in the best interest of low income workers; 3 the dramatic expansion of DC plans has created problems not associated with DB plans i.

This coverage has remained virtually unchanged since despite the economic boom. Pension coverage is sharply related to earnings for males and females; coverage drops off as earnings decline. The strategy of using favorable tax treatment to encourage qualified plan coverage for low income workers has failed. The system should be reformed by taking lower income workers out of the employment-based system and putting them into a USA-type account like those proposed by President Clinton.

This would involve two components: 1 tax credits for contributions, and 2 a matching contribution for low income individuals. A problem with k plans is the shift of the burden for providing for retirement to the employee: whether to participate, how much to contribute; and how to invest. Lower income, younger, less educated, less tenured workers tend not to participate.

People with short planning horizons may choose not to participate. Plan structure also affects the decision whether to participate: whether there is an employer match, and whether plan loans are available. Human inertia is also a factor affecting participation. The negative election movement may help increase participation.

The payment of lump sum distributions by DC plans is a problem. These create problems of under consumption in retirement as well as of outliving retirement income. Participants who receive a lump sum tend not to buy annuities from insurance companies, perhaps out of concern about loss of liquidity and the cost of annuities. Also, people are afraid of dying before getting value from the annuity.

The issue of post-retirement inflation protection has not received enough attention. Annuities tend to be fixed amounts. Inflation indexed annuities would make a good default form of benefit for DC and DB plans. The rate of private pension participation has been declining. Factors include the increase in contingent workers, the increase in DC plans, and the decrease in DB plans.

Coverage rates have increased among small firms, perhaps because of recent legislation. But, the legislation has not helped DB plans and large employees. Cost of plans, particularly DB plans, discourages sponsorship. The volatility of contribution requirements also discourages DB plan sponsorship. Complex restrictive and conflicting laws and regulations discourage plan sponsorship.

DB plans cannot be adopted to workforce needs. Other factors discouraging plan sponsorship are the cost of plan administration and compliance, unpredictable revenue flows especially for new and small employers , the part-time and seasonal nature of employment, the lack of valuing of DB benefits and tax advantages, the lack of sense of need, employees' belief that they don't need any more than Social Security, and employers' lack of knowledge about simple alternatives.

A Hay Huggins study showed that administrative costs have increased a lot, and these costs may wipe out the tax advantages. This is a concern for large employers as well as small employers. DB plans have higher participation rates, involve less risk for employees, and provide annuities.

This is another example of legislation favoring DC plans over DB plans. There are other problems with the tax credit provision e. The credit should be increased or given to all employers.

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The regulatory rules are confusing to employers and employees, and these rules can interfere with beneficial plan design. The rules need to be simplified. There should be one pension regulatory agency to ensure consistent rules. Joint rule-making could be the first step.

Incentives are better than mandates.

Overview of Multiemployer Pension System Issues | American Academy of Actuaries

For example, tax credits or lower tax rates could be given to annuities. Employers could be incented with higher maximum or less regulation to have negative elections at hire date and pay increase dates , coverage of all workers part-time, temps, contractors. Action that the government could take to increase coverage of low income workers include making the tax credit refundable.

Preparing for retirement was easier 25 years ago: there were fewer employers; more DB plan coverage; people saved more; workers tended to retire at age 65; retirement planning was a matter of adding DB plan monthly benefits to Social Security. Since then: job tenures have declined steeply; particularly for men ages ; retirement age is down to 62 or below; people live two years longer; employees tend to be covered by DC plans that do not provide annuities; people save less and are indebted more; and DB benefits plus Social Security are not adequate to cover basic expenses.

It is a lot more difficult to decide when to retire today. Indexed annuities and annuities at a younger age will produce even lower annual amounts. An alternative to an annuity is spending the right amount out of the nest egg each year. But to know how much to spend requires knowing when you are going to die. If they guess wrong, they could run out of money and be unable to return to work at an advanced age.

The government would end up with the liabilities. The remedy is education regarding the need to save, about the value of DB plans, and about the "de-accumulation" or pay-out of pension benefits. Education is needed on when to retire; that normal retirement age should be 70, not 55 or We are living longer, health status now at 70 is about what it used to be at 65, there are fewer DB plans with subsidized early retirement, and Social Security is moving to age Pension plans should be allowed to increase normal retirement age to 70 and move the mandatory distribution age to 75 or Perhaps participants should be allowed to transfer money between their DC and DB plans, and buy annuities from their DB plan.

But, effective education needs to be personalized because of variations in the amounts that workers have and how much lifetime income they would produce. For example, DC plan or k account statements the amount of lifetime income that the balance would provide perhaps only for people over 50 , although that would be a complex task. Personalized education is needed also because income replacement needs vary. While some expenses may decline in retirement e. Personalized education is needed also on the issue of whether to take your pension in a lump sum.

The Pensions Assistance List of the American Academy of Actuaries is a listing of actuaries who are available to help people with retirement planning questions. Annuities can provide better benefits than a "do it yourself" approach. Insurers can pay higher benefits because of mortality experience and their ability to lock-in bond yields. Annuities have additional advantages: payable for life at a fixed rate no longevity or investment risk ; inflation risk can be eliminated with indexed annuities; and annuities have tax advantages.

Rappaport made the following points in her verbal and written presentations on the challenges of the post-retirement period which she illustrated through the "Story of Joan":. As people age, there are significant changes in their family status, in their health, in their ability to get around, in their ability to care for themselves and their property. They may require increasing levels of paid assistance. Even if they have long-term care policies, they may need costly assistance even before the policies are triggered.

The average family could not afford the costs. Key factors in the post-retirement environment include an individual's health and functional status, the fact that more benefits are paid as lump sums, there are longer periods of widowhood, single women are less well-off, work during retirement is increasing, and pensions and individual savings drive resources. The Society of Actuaries has been sponsoring a Retirement Needs Framework Project to: understand the needs of the elderly, post-retirement events, and sources of security; to explore modeling of events and data; to identify mismatches or gaps in the security systems financial products vs.

Post-retirement events or risks include inflation, death of family members, changes in functional status, unanticipated needs by family members; unanticipated medical needs, changes in housing needs, and special interests. All of these events have an economic impact, vary in their predictability, may or may not be coverable by existing financial vehicles, and available vehicles may or may not be adequate.

Retirement assets are needed for basic retirement income, to pay for acute medical services, to pay for or insure long-term care, to help other family members, and for travel, hobbies, and retirement dreams.