There is a glaring anachronism in the digitized dance of modern life, where our every need and whim is addressable with a few taps on a touchscreen. It's a system designed for a bygone era, ill-fitted for our augmented reality-blockchain-driven present and woefully unequipped for a future dominated by AI and longevity. It's the creaky, old-world machinery of our retirement system.

Dive with me into this analog abyss and explore the unsettling realities it imposes upon many of our fellow Americans. But fear not, for within this exposé lies the glimmer of a revised blueprint - a reimagining of a system reborn for our century.

Originally published: September 19, 2024

How we got here

It's no secret that many Americans face the grim reality of outliving their savings. We're living longer lives, but the investment options and longevity protection solutions are not evolving with us. In fact, 59% of retirees 85 and older have run out of money. So it's no surprise that 61% of people in their 40s are more afraid of running out of money than dying. (Allianz Life Study, 2023.)

The term "three-legged stool" is a old metaphor used by many financial advisors to represent the three main sources of income during retirement: Social Security benefits, employer-sponsored pensions, and personal savings. Together, these three elements were intended to ensure financial security for Americans in their retirement years. However, it was never anticipated that any one of these sources would be sufficient to sustain retirees independently.

Times have changed, though, and this metaphor is proving to be insufficient and archaic. Ever since the 1990s, pensions have been replaced with defined-contribution plans (which include 401ks) that place the investment burden on the individual. Why? Because corporations can save money and limit financial responsibility by replacing the guaranteed-for-life pension with these tax-advantaged plans.

Then there's Social Security, which could appear unstable with forecasts suggesting the system's reserves could potentially be depleted by 2033. The Social Security Board of Trustees' 2021 Annual Report raised concerns that, given the current expenditure rate, the Social Security Trust Fund may exhaust its resources within the next 20 years. (Social Security Administration. "A Summary of the 2021 Annual Reports.") And even if it is sustainable, it does not provide enough for most. This brings us to the third leg, personal savings.

Over the past decade, the savings rates for US workers have been remarkably low — the combination of recessions and static wages until recently have made saving money a challenge. However, given the instability of the other components, it's becoming increasingly important for individuals to save a greater percentage of their income. But that is not always realistic — between 55-63% of Americans are living paycheck to paycheck. ("Living paycheck to paycheck statistics", Bankrate, September 18, 2023.)

To further compound this issue, retirement is accompanied by numerous financial concerns. In general, people don't know how long they are going to live, how much money they will need, what their investment portfolio will return, how much money they can leave behind — the list goes on and on. And this is true for virtually everyone, no matter their age and income ranges.

As a result, a sizable portion of the American population is finding their savings insufficient in their later years, underscoring an immediate need for a shift in how we prepare for retirement. Let's take a look at the existing options available that are designed to help improve the system.

A look at the status quo

While there are several financial product options currently on the market aimed at addressing the retirement crisis, they each serve their intended purposes effectively. However, there may be room for enhanced efficiency in solving this issue, in my perspective. Let's take a look at each one and their challenges.

Insurance. One option is to get insurance. With basic term life insurance, the benefit is tied to death rather than longevity — it protects your family if you die early, but doesn't address the risk of outliving your money.

There are several insurance products that pay you while you're alive, like whole life or long-term care insurance. But these options require years of planning and funding, and payouts are often lower than needed. Plus, LTC insurance can reject up to 40% of clients due to underwriting guidelines like rejecting people for pre-existing health conditions and family medical histories. Insurance is a valuable product, but it's generally more efficient at mitigating tail risks than as a primary retirement savings vehicle.

Annuities. Another option is purchasing an annuity. These are popular and for good reason, as they provide a reliable stream of income for the rest of your life. But annuities only cover recurring and predictable expenses. Often, they require large upfront investments and usually tie up a majority of your portfolio. Plus, they're typically vulnerable to inflation, so they could still not be enough.

Annuities don't work for many clients because the minimum amount of money required is higher than what the average American can spend, and over a long period of time (ie, retirement) they do not provide market returns.

"Save more, spend less". The one-size fits all approach to "save more, spend less" does not work. In my opinion, this advice drives frugality and fear. It can lead to unnecessary frugality during healthy years or leave assets underdeployed over time. Even with an expert financial advisor who provides more than this standard advice, it's impossible to plan for the unknown. Plus, decumulation strategies target low cash balances at old age when assets may be needed most. Traditional planning tools often ask you to select a target age of death and work backward — an imprecise exercise for a variable no one can predict.

A different approach to late-life income

Savvly was built around a different question: how do you build meaningful protection for your late years without tying up the majority of your portfolio?

Savvly’s Longevity Benefit is designed to help investors build potential income for the later years of retirement. It adds a longevity-based reallocation layer to market-linked performance, creating the opportunity for additional payouts at ages 80, 85, 90, and 95 for investors who reach those milestones. Savvly is not insurance, not a guaranteed product, and not FDIC insured. For full details on fees, assumptions, risks, eligibility, and disclosures, visit savvly.com/disclosures.

This article is for informational purposes only and does not constitute investment, tax, or financial advice. Consult a qualified financial professional before making retirement planning decisions.